Many changes have been made over the last few years to help strengthen and improve the reverse mortgage program. For example, guidelines limit the amount of loan proceeds that are disbursed within the first year of the loan. The most recent changes were implemented last year in an effort to reduce the number of defaults. “The goal is to avoid making loans to borrowers who have a high likelihood of failing,” said Peter Bell, President of the National Reverse Mortgage Lenders Association. Now lenders must perform what’s called a “financial assessment” as part of the eligibility process. Financial assessment requires lenders to evaluate a borrower’s finances, including income and credit history. “Part of the assessment is an analysis of a borrower’s cash flow and residual income, since the borrower still owns the home and will be responsible for paying taxes, insurance and other housing-related expenses,” said Amy Ford, Director of Home Equity Initiatives with the National Council on Aging. Therefore, lenders look at the borrower’s income from employment, self-employment, social security, alimony, child support, military income, pensions, retirement accounts and other sources of income. Credit scores can help predict whether a reverse mortgage will default, so extra attention is given to any foreclosures and missed or late payments.1
All of this information is then used to calculate a borrower’s residual income. Residual income is the money left over after the homeowner pays their debts and personal expenses. The lender uses this to gauge whether the borrower has enough money to pay property taxes and insurance. “If the lender determines the borrower isn’t willing or able to make tax and insurance payments, then a portion of the mortgage proceeds will be set aside to cover these future costs.” The life expectancy set aside is calculated by estimating the cost of taxes and insurance (property & flood) over the life of the loan. While the set aside helps ensure high risk borrowers will have sufficient funds to cover these costs, if the amount is too large, the reverse mortgage may no longer make sense. If a borrower has a clean credit history, but not enough income to cover taxes and insurance, a partial set aside may be possible.1
If you’d like to learn more about reverse mortgages or want to find out if you’re eligible, please use our Reverse Mortgage Calculator or call us at 800.218.1415.
1 Mortgage: What reverse mortgage financial assessment means to you – chron.com, 9/16/16, http://www.chron.com/news/article/Mortgage-What-reverse-mortgage-financial-9226982.php.
Author: Meredith Manz