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A step that is required for every reverse mortgage applicant, the “Financial Assessment,” is a very important part of the application process. The purpose of the assessment, which is quite similar to the loan process that borrowers follow in getting a “forward” mortgage, is to further protect both the borrower and lender.
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.
Step one in the financial assessment is to look at the finances of the borrower, specifically his or her 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 financially struggling already 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, but it can signal that they will have to take additional measures for reverse mortgage eligibility.
Step two is determining whether the borrower will need to set aside part of the mortgage proceeds—based on the results of the financial assessment—to pay for loan obligations.* This “set aside” money will help cover estimated tax and insurance payments over the expected life of the youngest borrower. This is known as a LESA—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 various cases. For example, if a prospective borrower has great credit history but doesn’t have the documented income to make tax and insurance payments, a partially funded LESA may help this person qualify.
If you would like to learn more specific details on how to navigate your financial assessment, please contact a Finance of America Reverse mortgage professional today. We are here to help educate you and answer all of your questions. There is no obligation, just education.
*The borrower meets all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.