To qualify for a reverse mortgage, borrowers must now prove they can afford the ongoing property costs.
There will soon be a new hurdle for homeowners applying for reverse mortgages. Borrowers who fail the financial assessment could be denied a loan. The best reverse mortgage lender, American Advisors Group, says it's the biggest change the industry has ever seen.
Ongoing Costs
The financial assessment is meant to make sure that borrowers can pay ongoing costs, such as property taxes and homeowners insurance, throughout the loan term. As a result of unpaid taxes and insurance, the federal government, which backs reverse mortgages, has seen about 10% of loans default.
Previously, reverse mortgage borrowers did not have to submit the same income and credit checks as traditional mortgage borrowers. The main concern of reverse mortgage lenders has been the amount of equity in the borrower's home and the home's value.
The lender considers all of the borrower's income streams, including Social Security and pensions, plus any additional sources of income, such as investments. The borrower will have to provide documents such as tax returns and bank statements.
The lender determines whether the explanation qualifies as an “extenuating circumstance” when approving the loan.
The amount of equity in the home is important. According to the president of the National Reverse Mortgage Lenders Association, if someone falls short on the assessment but has equity in the home, it counts as a resource.
Putting Money Aside for Expenses
In the financial assessment, the lender determines whether a certain amount of money will need to be set aside to cover property taxes and other expenses during the loan term. Borrowers will not be able to receive as much money from the loan proceeds due to the “set aside”.
If set-aside is needed, the lender subtracts the borrower's assets from property charges, debt obligations, and other living expenses. Every month the resulting “residual income” is the amount of money left. It compares this figure to a government threshold amount (based on region and family size) that determines if a borrower has enough residual income to pass the assessment. The minimum residual income in Massachusetts for a family of two is $906 a month.
The borrower's shortfall in residual income or credit problems cause the lender to set aside a portion of the loan proceeds. The chief executive officer of All Reverse Mortgage Co. says that older borrowers might have less to set aside.
Borrower's large shortfall causes all property taxes and insurance set aside. The lender will pay these expenses from the set-aside.
Small shortfalls require only a partial set-aside. According to an expert, for example, if the shortfall is $100 a month, the amount set aside should just cover that $100 monthly difference.
Conclusion
The times have changed so has the requirement for reverse mortgages. If you are looking to get a reverse mortgage for yourself. Feel free to reach out to PierPoint Mortgage. They have the best mortgage broker Los Angeles that can help you get the reverse mortgage at pretty affordable rates. For more information, reach out to them.
