Reverse Mortgage Qualifications:
If you are a senior homeowner with equity in your home, qualifying for a Reverse Mortgage shouldn't be difficult. The loan is based on three simple things: your age, value of your home, and interest rates. Here are the Reverse Mortgage requirements:
• All borrowers must be at least 62 years of age. (There are some proprietary Reverse Mortgage products where 60 is the minimum age.)
• You must own your own home, condo, townhouse, some mixed-use, or manufactured home and live in it as your primary residence for at least 6 months out of the year. Acceptable home types: 1-4 unit single-family homes, attached or detached, with the borrower residing in one of the units as their primary residence). Co-ops are not acceptable dwelling types for reverse mortgages.
• You cannot be delinquent on any federal debt.
• HUD-approved HECM Counseling is required. Once the counseling is completed, you will be issued a signed HECM Counseling Certificate by your HECM counselor which is required to begin the mortgage process. (Non-borrowing spouses must attend HECM counseling as well as anyone who is a party to the transaction such as an owner who plans to execute a quit-claim deed or the owner of a remainder interest in the property).
• You must show by your income that you can pay your real estate taxes, homeowner's insurance, flood insurance where required and condo /HOA fees where applicable. You must pass a financial assessment which determines your financial fitness which includes a credit report and a review of your credit payment history and property tax payment history.
What is the Expected Interest Rate? Why does it matter?
On reverse mortgages, rates are important as they determine just how much money you'll receive. On a HECM, there are two rates of interest that apply to the loan. One of these rates is called the expected rate. Now, with fixed rates, the rate and the expected are the same. But not so with the adjustable rate HECM. First, let's discuss something called the expected rate. The expected interest rate on the HECM is used to calculate the amount of proceeds available to a reverse mortgage borrower. These proceeds are called the Principal Limit and are now based on the 10-year treasury bill or 10-year CMT, the constant maturity treasury index, which changes every Tuesday. Prior to changing to CMT, the HECM expected rate was based on the 10-year LIBOR swap rate. At the end of 2021, HUD transitioned to the CMT as it was believed that the LIBOR was too easily manipulated.
Rates are always changing, so if you are interested in the HECM, it's a good idea to act quickly as the expected rate can go up and the higher the expected rate, the lower the Principal Limit, and that means less proceeds for you.
It should be noted that the expected interest rate is used only for calculation purposes at the outset of your loan at closing. Once an application is generated, you receive either the application rate or the closing rate-- whichever is lower. And the application rate is, to use a word "locked" for 120 days. So if expected rates rise, the proceeds are protected.
So what is the actual ongoing rate on your loan? It is called the applied rate or the initial rate. And with CMT, it is based on the 1-year CMT and is a monthly adjustable. After your closing, you will receive a monthly HECM statement showing the balance, interest, line of credit, and line of credit growth rate if any. You can track the rise in rates or if they should fall. You can also track the CMT by going online to the Federal Reserve.gov website.
Now, if the borrower elects a fixed rate, the mortgage rate and the expected rate are the same, but if the borrower selects an adjustable rate, the two will differ.
Reverse Mortgage Financial Assessment - Why is it Done?
In 2015, HUD initiated new rules for qualifying prospective HECM borrowers. It's called the Financial Assessment. HUD is trying to limit the number of defaults for non-payment of property taxes and homeowner's insurance.
Financial Assessment - Reviewing credit history and property charge payment history.
The lender is required by HUD to evaluate your financial fitness for a HECM loan. The lender will review your credit report and your payment history, but a minimum credit SCORE is not a qualifying factor. There will be an analysis of your real estate tax payment history. The purpose of the financial assessment is to determine whether or not a HECM borrower has sufficient income to pay ongoing expenses on their home. The lender will determine whether the applicant has the willingness and capacity to afford mandatory reverse mortgage obligations such as property taxes, homeowner’s insurance, HOA fees, and other property charges.
What does a lender look for?
With reverse mortgages, underwriters look for stable income to support ongoing expenses on the home. Underwriters review employment, pensions, social security, and assets which can all be used to substantiate a stable income. Underwriters analyze if the borrower's income and assets are adequate enough to pay taxes and homeowner's insurance payments throughout the life of the loan. If you want to prevent senior homeowners from running into financial difficulties (much as you would with any other mortgage), a financial assessment is a procedure we should all welcome.
Lenders make the final decision on Financial Assessment.
After conducting a Financial Assessment, the lender will determine whether you have the financial ability to handle paying your taxes and homeowner's insurance on your own. If not, monies from the proceeds of your closing will be put into a set-aside account, and your taxes and homeowner's will be paid by your HECM lender or servicer when they become due. This account is called a LESA, Life Expectancy Set Aside.
Everyone has questions in life and most senior homeowners and their families have questions about reverse mortgages.
You can learn more about the program by clicking the below link for FAQ-QUESTIONS PEOPLE ASK. You will learn when the program started, how much can you borrow, can you lose your home if you have a reverse mortgage, are your children responsible for paying back the r reverse mortgage, can you deduct the interest from your taxes, etc.
Questions? Call Advisors Mortgage! Advisors Mortgage: 888-843-9797 or 631-804-9044
LESA, Life Expectancy Set Aside, implemented by HUD made the HECM better.
A LESA sets aside some of the proceeds of the reverse mortgage for those borrowers who do not pass a Financial Assessment and do not have sufficient funds to pay their property charges (taxes and homeowner’s insurance). The LESA is also used for those borrowers whose credit history is less than stellar and is revealed in poor mortgage history, credit payment history, or real estate tax history.
HUD introduced the LESA to reduce the chances that borrowers would default on their HECM loan due to non-payment of their property charges.
Since the introduction of the Financial Assessment and LESA, it has proven successful. There are some borrowers who request a LESA so they do not have to worry about paying property charges. NOTE: If a lender determines the applicant does not need a fully-funded LESA, it may establish what is known as a partially-funded LESA if the applicant is capable of managing a portion of what would have been required under a fully-funded LESA.
The Life Expectancy Set-Aside funds are not an escrow account but are in a set aside.
They are not subject to interest and mortgage insurance premiums until those funds are paid toward property insurance or taxes. As these are paid, the amount of the payment shifts from the set aside to the loan balance.
Set-aside funds for payment of property charges, a one-time contribution.
This one-time contribution to the fund is based on your life expectancy rather than ongoing deposits to the fund. The specified amount in your closing documents remains in the LESA account. The set-aside amount increases at the same rate the line of credit increases. Property charges are deducted from your LESA account as they are paid, and once these funds have been depleted (if you exceed your life expectancy), you are then responsible for paying all property charges.
(Note: Once a LESA is placed on your reverse mortgage, it cannot be removed unless you do a reverse mortgage refinance).
IMPORTANT NOTE: Naturally, the LESA funds will be deducted from the lending limit or Maximum Claim Amount so this essentially reduces the borrower's proceeds. There are times that a LESA will preclude a HECM borrower from obtaining a reverse mortgage especially if their current mortgage balance is significantly high. There may not be enough proceeds to do the loan if a full LESA is required or even a partial LESA on top of your mortgage balance. But where a LESA does work, the LESA does not detract from the reverse mortgage but actually protects borrowers from the dangers of default due to unpaid property charges.
How do lenders determine who will require a LESA? How is the financial assessment done? (If you don't need technicalities, skip this!)
1. One part of the financial assessment is a cash flow analysis and calculation of basic housing expenses. HECM applicants must meet FHA eligibility criteria as to income. Therefore, it is required that lenders calculate a borrower's basic housing expenses (maintenance and utilities) by using a factor of 14 cents per square foot times the square footage of your home. So, for instance, if your home is 1,400 square feet and you multiply that times .14, that would equal $196.00 per month.
2. Your maintenance and utilities expenses will be added to your monthly expenses shown on your credit report (car payments, credit cards, personal loans, school loans, etc.) and compared with your income from all sources. This is how lenders determine your residual income.
3. What is residual income? Residual income is the money an individual has left over each month after all personal debts and expenses have been paid. Residual income in the United States differs from region to region. Each region of the country ( (northeast, south, midwest, west) requires differing amounts of residual income according to family size. There is a minimum residual income requirement for one person, two people, three people, etc. On a reverse mortgage, residual income is the monthly minimum income required for borrowers to be approved for a HECM and to also avoid a LESA.
4. Examples: In the northeast, a single borrower is required to have $540 per month in residual income, two borrowers are required to have $906 per month in residual income. In the west, it's $589 per month for one person, $998 per month for two people and so on.
5. If there are credit payment history issues or real estate tax delinquencies, you will be required to have a LESA on your HECM but be approved for a reverse mortgage. The lender will take care of paying your taxes and home insurance for the life of the loan (based on your life expectancy).
Extenuating Circumstances Explained-Sometimes Documentation Can Preclude a LESA on Your Reverse Mortgage
Extenuating circumstances are situations beyond a borrower's control that caused a particular financial situation. They may include, but are not limited to:
As part of the financial assessment, lenders must document any extenuating circumstances the borrower has experienced. This documentation must demonstrate the connection between the specific occurrence(s) and the impact of the occurrence(s) on the borrower's finances.
It used to be that if a borrower had a spouse who was under age 62 and that borrower was not on the reverse mortgage (Home Equity Conversion Mortgage or HECM), once the borrower passed away, the spouse would eventually have to leave the home if they could not pay off the reverse mortgage. Death is considered a "maturity event" in the reverse mortgage world, and this was a tough situation. For this reason, we discouraged borrowers from taking out a reverse mortgage if their spouse was under 62 years of age.
Reverse Mortgage Stabilization Act of 2013:
Thankfully, through the Reverse Mortgage Stabilization Act of 2013, there has been a change in reverse mortgage parameters so that even IF you have a spouse who is not 62 years of age, you can still apply for a reverse mortgage. By being listed on the HECM as a non-borrowing spouse, he/she will be protected and be able to remain in the home after your passing, and the reverse mortgage will not become due and payable after the reverse mortgage borrower passes away. You can also refer to the HUD Mortgagee
Letter # 2014-07, April 25, 2014 regarding non-borrowing pouse parameters.
However, if there is a HECM line of credit, it would no longer be accessible, and any monthly proceeds would end. Speak to your reverse mortgage professional about these issues to see if a Reverse Mortgage is still a viable option for you.
NOTE: Prior to obtaining a reverse mortgage, consult an attorney to obtain any necessary documents in existence such as will, life estate, power of attorney, marriage certificate (only as applicable) as these documents will be reviewed by an underwriter at the lender especially if there is a non-borrowing spouse.
What happens when a
HECM borrower passes away?
According to HUD, Housing and Urban Development, non-borrowing spouses may continue to live in the mortgaged property after the death of the last remaining
HECM borrower provided they meet all the established FHA requirements and as long as the HECM loan is not in default (such as failure to pay required property taxes or hazard insurance payments, failure to maintain the home if good condition, and failure to occupy the home as your primary resident).
An eligible surviving, non-borrowing spouse may continue to live in the mortgaged property after the death of the last surviving HECM borrower, if the following conditions are met and continue to be met:
1. The non-borrowing spouse is named in the loan documents as a non-borrowing spouse.
2. The HECM cannot be in default (eligible to be called due and payable) for any reason other than the last borrower’s death (i.e., failure to pay required property taxes or hazard insurance payments, failure to maintain the property according to FHA requirements); and 3. The borrower and his or her spouse were either:
a. legally married at the time the HECM closed
and remained married until the HECM borrower’s
b. engaged in a committed relationship akin to marriage but were legally prohibited from marrying before the closing of the HECM because of the gender of the borrower and Non-Borrowing Spouse, if the spouses legally married before the death of the
borrower and remained mar ried until the death of the borrowing spouse; and
4. The non-borrowing spouse lived in the property at loan closing and continues to live in the property as his or her principal residence.
It is required by HUD that you receive Reverse Mortgage counseling called HECM counseling by a HUD-approved and independent party, After the counseling session is completed (which can be done by phone), you will receive a HECM counseling certificate which you will pass on to your Reverse Mortgage Specialist to be submitted to the lender.
This type of counseling was initiated so that borrowers would fully understand the steps they are taking and offer possible alternatives. You can bring family or friends to the counseling session and anyone who will be affected by the reverse mortgage transaction such as those who are currently listed on title, non borrowers, etc.
WHEN YOU ARE READY TO MOVE FORWARD
Once you have made your decision to go forward with a reverse mortgage, consult your attorney to obtain any necessary documents (where applicable) such as will, life estate, power of attorney, guardianship, marriage certificate as these documents will need to be reviewed by an underwriter as part of your reverse mortgages application documents. Reverse mortgages, if properly understood, can be another tool for managing retirement income and personal spending. Never hesitate to ask questions. We are here to help.
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