Tom MacDonald - Reverse Mortgage Consultant

     

 

 

 

 

       Reverse Mortgage Consultant

      Tom MacDonald

 

       707-265-6385      800-801-5727   Is This The Best Reverse Mortgage Website in the U.S.*

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Financial Assessment Information

As of April 27, 2015 lenders must use financial and credit information to qualify borrowers.

The goal is to make sure new borrowers have the ability and inclination to keep current with their home owners insurance and property taxes.  Currently an estimated 8% of all reverse mortgage borrowers have been in technical default of their home owners insurance (sometimes called fire insurance) and/or their property taxes.

One of the reasons for foreclosure is for not keeping these two items up to date.  See my Foreclosure page.  Until January 2011, lenders would typically advance the funds to make these payments and add them to the principal.  In January, 2011, HUD required lenders to stop that practice and to foreclose.  This is one of the reasons Wells Fargo stopped doing Reverse Mortgages.  They didn't want the headline risk.

It is similar but different from qualifying for a regular mortgage (what we in the industry call a forward mortgage - the opposite of a reverse mortgage). 

It mainly looks at cash flow and tries to determine if there are expected to be enough funds to keep up with the borrower's necessities as well as paying their taxes and insurance.

Income - The loan originator will ask the borrower for their income information. The borrower will be asked to sign a 4506T form that allows the lender to gather tax information from the IRS.  If the borrower does not file taxes, they will be asked to provide income documents.  For many, this will be their social security award letter.  If they have other income, it may include 1099's and W-2s.

Expenses - As before, the loan originator will ask for the homeowner's insurance declaration page which recaps the insurance company as well as coverage, expiration dates and the cost.

Also, as before, they will ask for the most recent property tax recap that shows the annual cost.

Previously, a credit report was run to determine if there were any federal liens (such as back taxes or student loans - they had to be paid off as part of the process.  Now, the loan originator will note any non-real estate obligations.  They will note the total as well as the monthly payments.

New to this process will be an index (borrowed from VA loans) to estimate utilities based on the home's square footage.

If the cash flow (income minus expenses) meets guidelines and the credit is not an issue, then the loan passes this criteria and is handled the same as before from here on.

Further Reviews - If not, then mitigating factors such as existing liquid assets (IRAs, investments, other real estate income, etc) and the unused portion of the reverse mortgage are considered with a monthly amount applied to income over the life expectancy of the borrower(s).

If this does not give it a pass on the numerical guidelines, it then goes to an underwriter who reviews past credit (did the borrower typically keep up with their obligations), other income alternatives and Letters of Explanation that may provide additional background to explain the borrower's numbers.

Your Loan Originator - A good loan originator should be able to keep this relatively simple for you.  The originator probably has a way to determine in advance if there are likely issues to appear and can properly set your expectations.

If you don't pass? - There are procedures to still help you qualify for a Reverse Mortgage.  It is called LESA (Life Expectancy Set-Aside). 

Summary - In general, a reverse mortgage makes the financial life of a borrower easier than it was before.  If someone is currently current on their taxes and insurance, they are likely to remain current.  If they are behind, the reverse mortgage may be the tool that gives them a stronger financial footing to be able to keep up. 

If the system were spot on and could identify the 8% of potential failures and pass all they others, that would be a 92% pass rate.  In truth, they system will not spot all the potential failures.  That happens sometimes because of unforeseen circumstances (medical issues, unexpected loss of income, unexpected increase of expenses).  So the optimist in me estimates the pass rate will likely exceed 90-95%.  Only time will tell.