Compensating factors help compensate for a shortfall in residual income, which is a key qualifying component of the financial assessment guidelines implemented in 2014.
Residual income is calculated by adding up all of your monthly qualifying income and deducting debt payments (excluding mortgage payments to be eliminated by the reverse mortgage), monthly property charges (property taxes, homeowner’s insurance, HOA dues, etc., and an estimate of utility costs based on the square footage of your home.
The remaining residual income must meet a certain threshold based on your region and the number of people living in your home. If your residual income comes up short, it’s possible to make up for it and still qualify using certain compensating factors.
The following compensating factors can be used individually or combined to reach 100% of the residual income requirement:
- Documented income from an eligible non-borrowing spouse.
- Documented overtime, seasonal, bonus, or part-time job income that has been received for at least six months and is likely to continue.
- Pension or Social Security income that is to begin within the next 12 months.
- Imputed income from HECM proceeds available after closing. In other words, if you receive a lump sum or have a line of credit available after closing, these proceeds can be counted as hypothetical “income” using dissipation.
The following compensating factors can be used to reach 100% of the residual income requirement, but cannot be combined with any others. These compensating factors can only be applied when the baseline residual income is at least 80% of the required threshold.
- Income has not declined and all property charges have been paid directly by the borrower (no escrow accounts, for example) on time with no penalty for at least the last 24 months.
- The borrower has assets equivalent to the anticipated property charges for the borrower’s remaining life expectancy (based on Loan Period 2 of the Assumed Loan Periods for Computations of Total Annual Loan Cost Rates) that have not already been included in the residual income calculation.
- HECM proceeds remaining after closing that were not already counted in residual income calculations can be used to hypothetically pay off revolving or installment debt or collections.
- Access to other established revolving credit that can help the borrower endure a financial hardship.
If compensating factors are applied and the borrower still fails to meet the residual income requirement, the lender will likely require a LESA. If the residual income is still less than 80% after applying the LESA, it’s likely the application will be declined.