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 the 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 the 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. Applicants who fail satisfactory credit may still be approved without a LESA by documenting extenuating circumstances that led directly to the bad credit. Valid extenuating circumstances include the loss of a 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 credit is bad enough, it’s possible the reverse mortgage won’t be approved at all, with or without a LESA.
Check your credit before applying
If you’re planning to apply for a reverse mortgage (or any home loan, for that matter), it’s always a good idea to check your credit ahead of time. That way you can catch any errors or solve any issues before they become a problem when you’re trying to qualify for a reverse mortgage.
You can get your credit report for free once per year at the federally-sanctioned website annualcreditreport.com.