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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 has no provisions that will disqualify a borrower. If a borrower should fail either the credit or income 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 there are no Financial Assessment conditions that automatically disqualify borrowers, 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 below.

HECM Financial Assessment Guidelines

The following credit/income analysis guidelines were implemented by HECM Financial Assessment:

CREDIT

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.

RESIDUAL INCOME

Residual income is checked in a VA style residual income calculator. Residual income is calculated by:

  • 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

Residual income requirements for the Western Region are:

  • Single person household
    • $589

  • Two person household
    • $998

  • Three person household
    • $1031

  • Four or more people residing in the home
    • $1160

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 insured loan.

  • 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.
 
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A Non-Recourse Loan
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HECM for Purchase

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First Federal
Savings Bank
NMLS 402963
1880 S Eagle Rd
Meridian, ID 83642

dcook@bankfirstfed.com
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Home | HECM Basics | 12 Facts | Borrower Qualifications | Loan Process | Financial Assessment
Who Owns the Home? | Who Owns the Equity? | When is the Loan Due? | A Non-Recourse Loan | It's Your Money
| HECM for Purchase |
Copyright© 2019 Doug Cook FDIC & Equal Housing Lender Logo
HECM borrowers are responsible for the payment of property taxes, homeowners insurance, and the maintenance of their home. Rates and fees vary by lender. All credit products subject to approval. Information presented was not created or approved by HUD/FHA.
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First Federal Savings Bank | 1880 S Eagle Rd | Meridian, ID 83642
Institution NMLS: 402963

www.MortgageFirstFed.com/dcook
www.BankFirstFed.com

First Federal Savings Bank provides HECM Reverse Mortgage lending in the states of
Idaho, Oregon, Washington, Montana, Wyoming, Utah and Nevada.
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