Navigating the Reverse Mortgage Financial Assessment

Every reverse mortgage applicant is required to undergo a financial assessment as part of the application process. This important step, required by law, is designed to protect the borrower and ensure they have the financial means to meet the loan’s requirements.

The assessment was designed to decrease the number of defaults on reverse mortgages and to help determine if a borrower is financially stable enough to take on a reverse mortgage.

Assess Credit History

The financial assessment begins with looking at the borrower’s finances, credit history, income, and debts. The credit history is a major component that can help determine if a person is more likely to default on a loan. If the borrower is already financially struggling and has loan payments past due or mounting credit card debt, this generally indicates a greater chance of default.

If this is the case, it doesn’t always mean that the borrower is ineligible for a reverse mortgage. Still, it can signal that they will have to take additional measures for reverse mortgage eligibility.

Consider a Life Expectancy Set Aside

The second step in the financial assessment examines whether the borrower will need to set aside part of the mortgage proceeds to pay for loan obligations like property taxes, fees, and insurance. This “set aside” money will help cover estimated tax and insurance payments over the expected life of the youngest borrower and is referred to as LESA or Life Expectancy Set Aside. The set aside reduces the amount of loan proceeds available to the borrower.

There are also partially funded set-asides. For example, suppose a prospective borrower has great credit history but doesn’t have the documented income to make tax and insurance payments. In that case, a partially-funded LESA may help this person qualify for a reverse mortgage.

This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.