Examine the applicant's credit report, including employment history, income, and debts, during the application process for a reverse mortgage. This current financial analysis requirement came into effect in 2015. In completing a reverse mortgage's financial assessment, lenders review the borrower's income sources like Social Security, pensions, and other retirement accounts, as well as investment accounts.
It was first introduced following years of troubles with borrowers unable to pay current with their property tax and homeowner’s insurance costs. In the end, homeowners lost their homes due to foreclosure, and lenders made insurance claims to FHA. Federal Housing Administration (FHA) compensates for loan losses. Financial assessment of reverse mortgages designed to stop this issue from happening.
How an RMFA Works
A reverse mortgage does not need the borrower to pay monthly mortgage payments, like the traditional or forward-looking mortgage. Instead, the borrower receives monthly installments to the lending institution. Additionally, unlike traditional mortgages, one can reverse a mortgage and not need the borrower to be by their credit score or income. In contrast, approval for a reverse mortgage is determined by the borrower's age, the loan's interest rate, and the fact that they have a low or no mortgage balance not owing to the Federal government, as well as the condition of the property and its the appraised value.
Reverse mortgages are offered only to those who are 62 or over. These individuals may not be employed and receive small sources of income such as Social Security or pensions or an employer-sponsored retirement plan, as well as an individual retirement account (IRA). The goal of the financial evaluation is to ensure that the borrower can pay for ongoing homeowners insurance and tax payments on this small income. Borrowers must provide certain documents, including bank accounts and tax return statements, to complete the process.
A financial report that shows inadequate assets or income or a record of paying bills on time doesn't suggest that the borrower won't be able to get the reverse mortgage. For instance, if the credit report reveals previous issues with paying bills punctually, the borrower is allowed to justify. If a pattern of credit issues is discovered, the lender will decide if extenuating conditions caused the problems.
Life Expectancy Set-Aside
If the financial evaluation uncovers issues, the lender could request that the borrower establish what's known as the life expectancy set aside. This is a form of escrow account built up from the borrower's reverse mortgage funds. The assessment will determine the amount the borrower needs to put aside to pay for property taxes, insurance, and other required fees. The amount will be deducted from the loan amount accessible to the borrower. But, not all loanees will incur these ongoing expenses, such as flood insurance, homeowner’s association fees, and mortgage servicing fees for the length of their loans.
What Might a Financial Assessments Look Like?
The Department of Housing and Urban Development (HUD) is the agency that manages the federally-insured home equity conversion Mortgage (HECM) program, has for years stated it plans to issue guidelines to lenders to follow in evaluating a reverse-mortgage applicant's financial capability and credit history, in addition to other pertinent factors.
While there isn't a formal policy in the absence of an official rule, it is possible that the National Reverse Mortgage Lenders Association issued guidance in June of 2011, urging lenders to run a monthly test of the debt-to-income ratio on prospective applicants; in addition to the ability to determine if a potential borrower is willing or capacity to meet with their financial obligations such as insurance and tax. The method of determining this could involve reviewing credit histories or proving income.
Who is Conducting Financial Assessments?
MetLife has been the first financial institution to institute a financial assessment for customers who have a reverse mortgage, based upon NRMLA's guidelines. The assessment consisted of three criteria to evaluate the residual cash flow of the borrower as well as credit history and principal limit utilization (PLU). Potential borrowers' PLU is determined by analyzing the balance of their mortgage and other debts and the repairs they have to make to their house in the course under the HECM program.
Simply put, the proportion of the Initial Principal Limit is used to meet obligatory payoffs once the loan is financed. If borrowers want to avail of a HECM Saver, which provides lower upfront origination costs to pay for a lower amount of loan, the PLU should be lower than or equivalent to 90 percent.
