Financial assessment encompasses a broad set of HECM reverse mortgage qualifying guidelines rolled out by FHA in 2014. The goal behind the new guidelines was to reduce defaults resulting from nonpayment of required property charges. FHA now requires lenders to more extensively analyze a reverse mortgage applicant’s income, credit history, and property charge payment history.
Prior to financial assessment, there were very few credit and income qualifications to get a reverse mortgage. Applicants could have zero income and terrible credit and still qualify with no issue.
Today, the financial assessment guidelines require you to demonstrate a financial ability and financial willingness to pay your property charges. Financial ability is evaluated through an analysis of your income, expenses, and residual income. Financial willingness is evaluated through an analysis of your credit and property charge payment history.
Determining financial willingness
To demonstrate financial willingness, your credit history and property charge payment history must be considered satisfactory. Unlike in the “forward” mortgage world, credit scores themselves don’t matter. What matters is how well you pay debt obligations, property charges, and whether or not you have derogatory credit like collections, charge offs, bankruptcies, foreclosures, etc.
If your credit or property charge payment history isn’t satisfactory, the lender may require a life expectancy set-aside (LESA). You may be able to avoid a LESA by documenting one or more extenuating circumstances. An extenuating circumstance is a one-time event beyond your control that led directly to the derogatory credit.
If your credit or property charge payment history isn’t satisfactory and you can’t document a valid extenuating circumstance, the lender will either require a LESA or decline the application.
Determining financial ability
To determine financial ability, you must must have adequate residual income or your lender will require a LESA. Residual income is defined as the income left over at the end of the month after paying debts (excluding mortgage payments eliminated by the reverse mortgage), property charges, and estimated maintenance and utilities.
If your residual income isn’t high enough, you may be able to avoid a LESA by documenting one or more compensating factors. If your residual income isn’t high enough and you can’t document one or more compensating factors, your lender will either require a LESA or decline the application.
