Residual income

The reverse mortgage residual income (RI) requirements are a key component of the FHA reverse mortgage lending requirements. So what are the requirements? How does residual income work? Why is it important?

Residual income was implemented with the new financial assessment guidelines rolled out in 2014. It’s important because it helps lenders determine if an applicant has the financial ability to pay their property charges.

If an applicant doesn’t meet the income standards, the lender may require a life expectancy set-aside (LESA). A LESA can be avoided if an applicant can document certain compensating factors that make up for the income shortfall. If one or more compensating factors cannot be documented, a LESA may be required or the applicant may not qualify at all (depending on the seriousness of the income shortfall).

The qualifying requirements

HECM Reverse Mortgage Residual Income Requirements By Family Size and RegionResidual income is calculated by adding up monthly income and deducting debt payments (excluding mortgage payments to be eliminated by the reverse mortgage), monthly property charges, and an estimate of utility and maintenance costs. Utility and maintenance costs are estimated based on the region and square footage of the home.

The remaining residual income must meet a certain threshold based on region and the number of people living in the home.

Figure 1 shows the required thresholds by region and household size.

HECM Reverse Mortgage Residual Income Calculation Example

Calculating residual income

Let’s look at an example of a residual income calculation. Let’s assume we’re working with a couple who lives in a 1,168 square foot home and has $2,125/month in total Social Security income.

Let’s also assume this couple lives in Texas, which is in FHA’s South region.

Figure 2 shows a breakdown of their monthly expenses. After the property charges, debt payments, and estimated maintenance and utilities are backed out, they are left with $1563.28 in disposable income.

Based on Figure 1, a household size of 2 in the South region needs to have at least $886/month in disposable income to qualify. As you can see, this couple clearly meets the reverse mortgage residual income requirements.

What if income comes up short?

What happens if the income comes up short because of high debt or low income? It’s still possible to qualify, but the applicant will need to document one or more compensating factors. Such factors can include income from other sources, unused proceeds available in the reverse mortgage after closing, available cash in retirement accounts or savings, etc.

If the RI is still short after compensating factors are applied, the lender may require a LESA or the applicant may not qualify at all.