Reverse Mortgage Financial Assessment

What is 'Reverse Mortgage Financial Assessment'

A review of the borrower’s credit history, employment history, debts and income during the reverse mortgage application process. The reverse mortgage financial assessment requirement became effective in 2015 after years of problems with borrowers being unable to afford to stay current on their property tax and homeowners insurance bills. The result of this financial instability was that borrowers were losing their homes to foreclosure and lenders were filing insurance claims with the Federal Housing Administration to cover their losses on these loans. The reverse mortgage financial assessment is intended to prevent this problem from occurring.

BREAKING DOWN 'Reverse Mortgage Financial Assessment'

Unlike a forward mortgage that a borrower uses to buy a home, a reverse mortgage does not require the borrower to qualify based on credit and income. The product is intended for seniors, who may no longer be working and who may have limited income from Social Security, a pension, an employer-sponsored retirement account or an individual retirement account. Reverse mortgage approval is based on the borrower’s age, the loan’s interest rate and the property’s appraised value.

Since the purpose of the financial assessment is to make sure the borrower can afford ongoing homeowners insurance and property tax payments, with the credit check being used to make sure they have a history of paying bills on time, a financial assessment that reveals insufficient income or assets or a history of paying bills late doesn’t necessarily mean the borrower won’t be approved. That’s because a reverse mortgage doesn’t require the borrower to make monthly mortgage payments; instead, the borrower receives a monthly payment from the lender. If the financial assessment reveals problems, the lender may require the borrower to establish a life expectancy set aside, a type of escrow account. This account is funded from the borrower’s reverse mortgage proceeds with enough money to pay property taxes, insurance and other required charges that only some borrowers have, such as flood insurance, homeowners association fees and mortgage servicing fees, for the expected duration of the loan.

To find out if a reverse mortgage is right for you, go to Is it a good idea to add a reverse mortgage to your retirement strategy?