Reverse mortgages have been in existence for nearly three decades, and the good news is that they’re safer today for borrowers and lenders. If you have been considering a reverse mortgage, there are some new features designed especially with borrowers’ as well as the lenders’ protections in mind.
Why the Change?
Reverse mortgages of the past had fewer financial requirements. Borrowers had to be 62 or older to qualify, but their credit history and income were not a major factor. Some people who were issued reverse mortgages eventually defaulted on their loan as they fell behind on property taxes, insurance payments or other required property charges.
To help prevent this from happening, HUD (U.S. Department of Housing and Urban Development) implemented some changes to make the FHA-insured Home Equity Conversion Mortgage (HECM) program safer. Recent data reports that one of the major features, the Financial Assessment (FA), reduced the tax and insurance default rate from 1.17% to 0.39% for HECM’s post-FA.*
The New Safety Features
The biggest change is the implementation of the Financial Assessment: Lenders must now carefully review a borrower’s financial history to make a more thorough determination of whether the borrower is likely to remain on sound financial footing after getting the reverse mortgage. This includes:
- The Financial Assessment (FA) evaluates the borrower’s willingness and capacity to meet his/her financial obligations and to comply with the mortgage requirements. Because borrowers are still required to pay property taxes, insurance and various other payments for the upkeep of the home, the assessment and documentation helps ensure that the borrower does not end up in a poor financial situation as a result of the loan.
The financial assessment is also used to determine whether, and under what conditions, the borrower meets FHA eligibility criteria and whether an allocation (set aside) of HECM proceeds will be required for payment of property charges.
- LESA (Life Expectancy Set-Aside) Where the lender determines, after considering any extenuating circumstances that the borrower has not demonstrated the willingness to meet his or her financial obligations i.e., credit history and/or property charge payment history is not acceptable, the LESA is money held aside to pay for property taxes and homeowner’s insurance during a reverse mortgage borrower’s lifetime. The “set aside” reduces the amount of loan proceeds available to the borrower. Note: The borrower cannot access fully-funded LESA funds.
Through the fully-funded Life Expectancy Set-Aside, the lender will use HECM proceeds to pay property taxes and insurance premiums on behalf of the borrower. The borrower remains responsible for all other property charges. All borrowers will go through the financial assessment, but only some are subject to the LESA requirement.
If you’re a homeowner age 62 and older considering a reverse mortgage and would like to learn more about today’s “safer” reverse mortgages, please contact a Finance of America Reverse mortgage professional today!
*Alex Spanko, “New Data Shows Financial Assessment Reduces Reverse Mortgage Defaults,” Reverse Mortgage Daily, February 20, 2017. http://reversemortgagedaily.com/2017/02/20/new-data-shows-financial-assessment-reduces-reverse-mortgage-defaults/
**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.