This is part 2 of 3 explaining the “New Reverse Mortgage” and the Financial Assessment that will change the program on April 27th, 2015
Qualifying for a reverse mortgage will require more documentation than it used to. The Financial Assessment’s legacy will be that it requires you to collect information on your assets and on your incomes/expenditures for the last two years — in as comprehensive a fashion as is possible.
That should be enough information to determine whether a potential borrower qualifies, but your loan originator and any FHA certified counselor that you end up working with will be the ones to direct you more specifically.
How will the lenders or originators be reading that information?
The Financial Assessment sets some new rules for lenders to follow, but it also leaves wiggle room for lenders to evaluate each individual application. The new rules understand that no one person’s financial life fits neatly into a template. There are plenty of chances to explain any extenuating circumstances you may have come to pass in your life. What counts as “extenuating circumstances” and how to use them will be explained below.
The preliminary information you will have to provide will be in 12 different categories, but do not despair. As was said above—about providing information on your incomes/expenditures and assets for the last two years — should cover most of the information needed. The Financial Assessment just breaks that information down into 12 categories as follows:
A) Property Charge Payment History
B) Credit History
D) Imputed Income (value of assets minus taxes they may be subject to only if sold, e.g. stocks and capital gains tax)
E) Estimated Maintenance and Utility Expenses (from a formula of $0.14/sq. foot)
F) Monthly Effective Income
G) Current Monthly Property Charges/Rates
H) Other Monthly Expenses
I) Residual Income
J) Monthly Property Taxes as Percentage of Monthly Income
K) Extenuating Circumstances
L) Compensating Factors
Some of the above information is just a statement of how much you own. Property Charge Payments and Credit History information is a little different. If you are wondered what a lender may be looking at when they look at these records you can know the basics now:
As per the Financial Assessment rules, they will be assessing whether you are current and/or delinquent with the following Property Charge Payments:
- Real estate taxes
- Other assessments
- HOA/PUD/Condo Fees
The originator will also check the amount of insurance in place on your home during the last 12 months of the following types and whether you have been delinquent on payments at any time in the last 24 months:
- Hazard/Homeowners Insurance
- Flood Insurance
What about my credit?
Research at The Ohio State University has shown that potential borrowers with lower credit scores are more likely to end up in default.[i] The Financial Assessment will therefore check your numeric score, but will more specifically check whether you have had any delinquent payments on any of your lines of credit over the last 24 months. They will make note of whether those delinquent payments were still outstanding at 30, 60 & 90 days, and they will count the number of times.
A mark against your lines of credit over the last 24 months does not immediately disqualify you from getting a reverse mortgage however. The Financial Assessment leaves room for extenuating circumstances. We will explain that now.
What Extenuating Circumstances can I Bring up to Help me Qualify for a Reverse Mortgage?
The FHA and HUD have demonstrated that they understand that no one’s financial lives fit perfectly into a narrow set of expectations. Instead, they have left room for potential borrowers to explain negative occurrences in their financial history, and the process has a capacity for understanding.
The following section is directly from HUD’s manual.
Extenuating circumstances beyond the mortgagor’s control may include, but are not limited to:
- Loss of income due to the death or divorce of a spouse that directly resulted in late payment of obligations;
- Loss of income to the potential borrower’s or spouse’s unemployment, reduced work hours or furloughs, or emergency medical treatment or hospitalization that directly resulted in late payments of obligations; or
- Increase in financial obligations due to emergency medical treatment or hospitalization for the potential borrower or spouse, emergency property repairs not covered by homeowners or flood insurance, divorce or other causes that directly resulted in late payments of obligations.
As you can tell, leeway may be made for circumstances outside of a potential borrower’s control. It will be up to the originator, underwriter, and lender to interpret these types of situations, and if the borrower can prove with documentation that an event directly led to a missed obligation, then the problem may not disqualify a borrower from a reverse mortgage.
We have now talked about half of how the Financial Assessment is going to change the Reverse Mortgage on April 27th, 2015. It will require more paperwork, and that will make it more difficult to qualify. The other half of the Financial Assessment is the “Life Expectancy” Set Aside that some borrowers may have to deal with.
Check back tomorrow for information on the Set Asides and how they may effect you and your loved ones.
[i] Moulton, Stephanie, Haurin, Donald & Shi, Wei, An Analysis of Default Risk in the Home Equity Converstion Mortgage (HECM) Program (January 25, 2015)