What Is a Reverse Mortgage Financial Assessment?
A reverse mortgage financial assessment is a review of the borrower’s credit history, employment history, debts, and income during the reverse mortgage application process. The current reverse mortgage financial assessment requirement became effective in 2015. During the reverse mortgage financial assessment, lenders examine all of the borrower’s sources of income, such as Social Security, pensions, and investments.
It was introduced after years of problems with borrowers being unable to afford to stay current on their property tax and homeowners insurance bills. As a result, borrowers were losing their homes to foreclosure, and lenders were filing insurance claims with the Federal Housing Administration (FHA) to cover their losses on these loans. The reverse mortgage financial assessment is intended to prevent this problem from occurring.
- A reverse mortgage financial assessment is a review of the borrower’s credit history, employment history, debts, and income during the reverse mortgage application process.
- During the reverse mortgage financial assessment, lenders examine all of the borrower’s sources of income, such as Social Security, pensions, and investments.
- The financial assessment is intended to prevent borrowers from being unable to afford to stay current on their property tax and homeowners insurance bills and losing their homes to foreclosure.
How a Reverse Mortgage Financial Assessment Works
Unlike a forward mortgage that a borrower uses to buy a home, a reverse mortgage does not require the borrower to qualify based on their credit score and current 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, 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. For example, the credit check is used to make sure they have a history of paying bills on time, although any past credit trouble will have to be explained.
Borrowers must provide certain documents, such as tax returns and bank account statements, as part of the process. If a pattern of credit problems emerges, the lender will determine if the credit problems were due to extenuating circumstances.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
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 account, a type of escrow account. This account is funded from the borrower’s reverse mortgage proceeds.
The assessment determines the amount of money that the borrower must set aside to pay property taxes, insurance, and other required charges. The "set aside" amount will reduce the number of loan proceeds available to the borrower.