HECM Financial Assesment
Credit and Income Qualification
Prior to the implementation of HECM Financial Assessment in 2015, reverse mortgage borrowers faced few credit or income qualifications. In the face of rising property tax and homeowners insurance defaults amongst current HECM borrowers, Financial Assessment guidelines were added in March of 2015.
Unlike conventional forward loan underwriting, HECM Financial Assessment is primarily concerned with the borrowers' willingness and capacity to pay property charges. If a borrower should fail either the credit or property charge assessment, the guidelines mandate that a portion of loan funds be set aside in an escrow type account to pay future property tax and homeowners insurance charges.
The dollar amount required in this fund is based on current property charges and the life expectancy of the youngest borrower. It is called the Life Expectancy Set Aside, or LESA.
While the only Financial Assessment condition that can automatically disqualify borrowers is failing the residual income calculation, imposing the LESA requirement can have the same effect.
In cases where the borrower has a current mortgage, their mortgage payoff + closing costs + LESA funds are required to be paid at closing. If the HECM loan proceeds are not enough, the borrower may bring their own cash to the table to make up the difference.
Funding the LESA in addition to retiring their current lien can price the HECM loan beyond many borrowers' means if the loan amount is not large enough to cover both.
There are FHA guidelines, in place pre-financial assessment, that do disqualify a borrower from qualifying for a HECM loan. See
Other FHA Guidelines
HECM Financial Assessment Guidelines
The following credit/income analysis guidelines were implemented by HECM Financial Assessment:
In general, HECM credit requirements are less stringent than those for conventional loans featuring payments. Credit requirements are:
- The credit report is checked for late payments over the past two years.
- Proof of timely property tax payments for the most recent 24 month period.
- Verification that there has been no lapse in the homeowner's insurance policy for the past 12 months.
- Verification that other property charges, such as HOA dues and water assessments, have been paid in a timely fashion over the previous 2 years.
Residual income is checked in a VA style residual income calculator. Residual income is calculated by:
Residual income requirements for the Western Region are:
- Total income from all sources (less):
- Revolving and installment debt payments
- Any mortgage payments other than the primary residence
- Property tax, homeowners insurance and HOA expense for all properties owned
- Average utility expense for the primary residence based on square footage
- Single person household
- Two person household
- Three person household
- Four or more people residing in the home
Other FHA Guidelines
The following guidelines were in place prior to Financail Assessment, although some of these were altered slightly by implementation of the current rules.
- Borrowers are allowed only one FHA loan. If they have
another FHA loan in place, it must be satisfied before they
are eligible for a HECM Reverse Mortgage loan.
- The borrowers' CAIVRS number must be clear. CAIVRS is
a Federal government database of delinquent Federal debtors.
If a borrower has any delinquent debt to, or guaranteed
by the government, they are not eligible for a HECM FHA
- HECM for Purchase borrowers cannot have had a
foreclosure or short sale within the last three years. For HECM refinance borrowers, any short sale or foreclosure activity falls under Financial Assessment guidelines.
- Cash to close for a HECM purchase must be sourced for
the previous 3 months. All funds must be the borrowers',
they cannot be borrowed. Funds must also be sourced for
refinances that require cash to close.
- In the case of HECM refinances, any liens or other borrower obligations that encumber the property must be retired.
- If a HECM borrower owns a second home or income properties, they must qualify sufficient income to maintain all properties, including their primary residence (or in the case of HECM purchases, the home that will be purchased). This requirement will be measured in the residual income test discussed above.