Beginning April 27, 2015, lenders will start conducting "financial assessments" of every reverse mortgage borrower to ensure that person has enough money to pay ongoing costs, such as property taxes and homeowners insurance, over the life of the loan.
Lenders will have to look at all of the borrower's income streams, such as Social Security and pensions, plus any additional resources, such as investments. Borrowers will have to provide documents such as tax returns and bank account statements.
Any credit trouble will have to be explained. The lender will determine whether the explanation qualifies as an "extenuating circumstance" in getting the loan approved.
The financial assessment determines whether the lender will need to set aside a certain amount of money to pay for property taxes and other expenses over the course of the loan. The "set aside" will reduce the amount of loan proceeds available to the borrower.
To figure whether a set-aside will be required, the lender subtracts property charges, debt obligations and other living expenses from the borrower's income and assets. The resulting "residual income" is the amount of money left over each month. This figure is compared to a government threshold amount (based on region and family size) that determines whether a borrower has enough monthly residual income to pass the assessment.
If there is a shortfall in residual income or credit problems, the lender will be required to carve out a set-aside from the loan proceeds.
A large shortfall requires a full set-aside that covers all property taxes and insurance over the borrower's life. The lender will pay the expenses from the set-aside.
If you have questions about any of these changes, you can contact a lender in your area or submit a question to NRMLA and we’ll try to answer it as best we can.