FAQ's Frequently Asked Questions on The NEW HECM
Reverse Mortgage - The Life Mortgage
The new reverse mortgage financial assessment has generated confusion and questions. Below are answers to the numerous questions asked regarding these new reverse mortgage guidelines.
What is considered satisfactory credit under the HECM Reverse Mortgage Financial Assessment Guidelines?
The borrower has made all housing and installment debt payments on time for the previous 12 months and no more than two 30 day lates in the previous 24 months. Major derogatory credit on revolving accounts include any payments made more than 90 days after the due date, or three or more payments more than 60 days after the due date.
What if credit is not satisfactory?
Additional analysis will be required as the lender/underwriter will analyze the delinquent accounts to determine whether late payments were based on a disregard for financial obligations, an inability to manage debt, or extenuating circumstances. If borrower has not demonstrated the willingness and there are no extenuating circumstances, a fully funded Life Expectancy Set-Aside (LESA) will be required.
How are property charges defined?
All property taxes, homeowner or hazard insurance and flood insurance, HOA or PUD fees, ground rents and municipalities assessments.
What is considered satisfactory property charge payment history?
All property charges are current and there are no property tax arrearages in the prior 24 months. Homeowners and flood insurance, if applicable were current and in place for a minimum of the prior 12 months.
What is the purpose of cash flow/residual income analysis?
The purpose of the cash flow/residual income analysis is to determine the capacity of the borrower to meet his or her financial obligations.
How is ‘Capacity’ determined?
Underwriters will do a Cash Flow analysis of all effective income minus all expenses to determine Capacity.
What is Imputed Income?
When liquid assets are added to the Cash Flow analysis determining potential income from assets such as savings accounts, 401k, IRA, Annuities, etc.
Why might extenuating circumstances be considered?
Where the borrower’s credit and/or property charge payment history does not meet the criteria, extenuating circumstances that led to the issues will be explored. They might include: Loss of income due to death or divorce of a spouse, job loss, medical problems etc.
What compensating factors might be considered?
Examples of compensating factors include but not limited to:
Borrower’s residual income is 80%-99% of the amount for the family size
Borrower has paid their own property charges directly for at least the past 24 months
All property charge payments have been made without incurring penalties during the last 24 months
Current income is not less than income during the previous 24 months.
Documented residual income from a non-borrowing spouse or family member living in the home
Financial liquidity through access to revolving credit or other sources
What is a Life Expectancy Set-Aside (LSA) and when is it required?
A Life Expectancy Set-Aside is an amount withheld from the mortgage proceeds for the payment of property charges during the life of the mortgagor. It is determined based on the results of the financial assessment of the potential borrower(s).
The formula for calculating the Projected Life Expectancy Property Charge Cost includes:
The projected sum of –current property taxes—homeowners insurance and/or flood insurance premiums
A factor to reflect increases in tax and insurance rates
The HECM expected average mortgage interest rate and
The life expectancy of the youngest borrower
When is a Life Expectancy Set-Aside not required?
When the borrower has demonstrated the willingness and the capacity to meet his or her property charge obligations a life expectancy set-aside is not required.
What is Fully Funded Life Expectancy Set-Aside (LSA) and when would it be required?
If the borrower has not demonstrated the willingness to meet financial obligations even where residual income is sufficient or they have capacity, a fully funded LSA would be required. HECM proceeds will be used to fund the set aside and the lender will pay property taxes and insurance premiums on behalf of the mortgagor.
What is partially funded LSA and when would it be required?
When the borrower shows willingness but not capacity or does not meet residual income and credit eligibility requirements including use of extenuating circumstances, compensating factors and how HECM proceeds may be used in assessing income and credit qualifications. HECM proceeds will be used to fund a partial set-aside and released to the borrower to pay the property charges.
Why does income and credit need to be scrutinized for reverse mortgage since it is a mortgage that does not require monthly payments?
The Secretary of HUD has determined that the Financial Analysis is necessary to improve fiscal soundness of the mortgage insurance fund and protect the viability of the HECM program.
Maggie O'Connel 800-684-9438