Reverse Mortgage Glossary
HECM Financial Assessment
Financial assessment encompasses a broad set of HECM reverse mortgage qualifying guidelines rolled out by FHA in 2014. Reverse mortgage lenders must now conduct a more in-depth analysis of an applicant’s credit history and income. The intent is to reduce reverse mortgage defaults by weeding out applicants with exceptionally poor income and credit histories.
FHA requires HECM borrowers to live in the home and continue paying required property charges (property taxes, homeowner’s insurance, HOA dues, etc.). Borrowers who fail to pay property charges risk default.
Defaults were a growing problem in the late 1990s and early 2000s and led to losses and bad headlines for the HECM program. FHA implemented HECM financial assessment to improve applicant quality and reduce the risk of defaults.
HECM financial assessment increases credit and income analysis
Prior to financial assessment, there were very few credit and income qualifications to get a reverse mortgage. Borrowers could have zero (or even negative) income and terrible credit and still qualify with no issue.
HECM applicants now have to demonstrate both a financial ability and financial willingness to keep up with their expenses. Financial ability is determined through income analysis and financial willingness is determined through credit analysis.
Unlike in the “forward” mortgage world, credit scores themselves don’t matter. What matters is payment histories and derogatory items like collections, charge offs, bankruptcies, foreclosures, etc.
If an applicant fails satisfactory credit, they may still avoid a LESA by documenting one or more extenuating circumstances. An extenuating circumstance is a one-time event beyond the applicant’s control that led directly to the bad credit.
If the applicant fails satisfactory credit and can’t document a valid extenuating circumstance, the lender will either require a LESA or the applicant may not qualify at all.
To determine financial ability, borrowers must have adequate residual income or the lender may require a LESA. Residual income is defined as the income left over at the end of the month after paying debts, property charges, and estimated maintenance and utilities.
If the applicant fails residual income, they may still avoid a LESA by documenting one or more compensating factors.
If the applicant fails residual income and can’t document one or more compensating factors, the lender may require a LESA or the applicant may not qualify at all.