Reverse Mortgage Glossary
Financial willingness is one of two major components of the HECM financial assessment guidelines rolled out in 2014 by FHA. The goal behind the new guidelines is to reduce defaults due to nonpayment of required property charges. Lenders are now required to more extensively analyze an applicant’s income and credit history as part of the qualification process.
The financial willingness component of financial assessment looks at an applicant’s credit to determine if they have a good history of managing their financial obligations. If an applicant fails to manage debt obligations well, it’s more likely they’ll fall behind on property charges as well, which is a significant risk factor for the HECM program.
Credit qualifying for a HECM reverse mortgage is much more forgiving than for many traditional forward mortgage programs. An applicant’s credit doesn’t need to be perfect, but he or she needs to have at least a reasonably good history of paying bills on time. If not, the lender may be required to carve out part of the reverse mortgage proceeds into a life expectancy set-aside, or LESA. The purpose of the LESA is to ensure that required property charges are paid on time for the borrower’s remaining estimated lifespan.
How Financial Willingness is Determined
Financial willingness has two basic components: satisfactory credit and extenuating circumstances. If the applicant fails the satisfactory credit test, they may be able to make up for it and avoid a LESA by documenting extenuating circumstances that led directly to the bad credit. Such extenuating circumstances could include loss of job, a major medical issue, divorce, death of spouse, etc.
If one or more extenuating circumstances cannot be documented, a LESA may be required.
If the applicant’s credit is bad enough, it’s possible the loan won’t be approved at all – with or without a LESA.