Financial assessment

HECM Reverse Mortgage Financial AssessmentFinancial 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.

A key requirement of the HECM program is the payment of property charges. Borrowers who fail to pay property charges risk default and the triggering of a maturity event that makes the loan due and payable in full.

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 defaults.

Financial assessment requires increased 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.

Determining financial willingness

To determine financial willingness, borrowers have to meet a standard called satisfactory credit or the lender may require a LESA, or life expectancy set aside.

Unlike in the “forward” mortgage world, credit scores themselves don’t matter. What matters is payment histories and derogatory credit 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 application will be declined.

Determining financial ability

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 (excluding mortgage payments eliminated by the reverse mortgage), 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 application will be declined.