Reverse Mortgage Glossary
Reverse mortgage lenders are now required to more extensively analyze an applicant’s credit history and income. The intent of the new guidelines is to reduce defaults by making sure reverse mortgage borrowers have adequate financial resources to keep up with their obligations under the HECM program.
One of the key requirements of the HECM reverse mortgage program is for borrowers to faithfully keep up with required property charges (property taxes, homeowner’s insurance, HOA dues, etc.). Borrowers that fail to pay property charges risk default, which means their reverse mortgage could become due and payable in full.
Defaults had been a growing problem since the late 1990s and were creating bad headlines for the program and losses for the FHA Mutual Mortgage Insurance (MMI) fund, which insures HECMs (see non-recourse). The long-term financial viability of the MMI fund is key to the long-term health of the HECM program, so FHA chose to tighten lending guidelines to address the problem.
Increased Credit and Income Analysis
Prior to financial assessment, there was very limited credit or income qualification required to get a HECM reverse mortgage. A borrower could literally have zero income and terrible credit and still potentially qualify with no issue.
HECM applicants now have to demonstrate both a financial ability and financial willingness to keep up with their expenses as part of the qualification process. Financial ability is determined by analyzing income and financial willingness is determined by analyzing an applicant’s credit history.
Unlike in the forward mortgage world, credit scores in themselves really don’t matter. It’s more about the payment history on debt obligations and the presence of derogatory items such as collections or chargeoffs.
If the applicant fails to meet the satisfactory credit standard, they may be able to avoid a LESA by documenting one or more extenuating circumstances that led to the bad the credit.
If the applicant fails satisfactory credit and can’t adequately document an extenuating circumstance, the lender may require a LESA or the applicant may not qualify at all (depending on how bad the credit history is).
To determine financial ability, borrowers have to demonstrate adequate residual income or the lender may require a LESA. Residual income is essentially what’s left over after paying all debt obligations, property charges, and estimated of maintenance and utilities based on the square footage of the home.
If the applicant fails to meet the residual income standard, they may be able to avoid a LESA by documenting one or more compensating factors that make up for the income shortfall.
If the applicant fails to meet the residual income standard and can’t adequately document one or more compensating factors, the lender may require a LESA or the applicant may not qualify at all (depending on how bad the income shortfall is).