What is a Financial Assessment?

Lenders must conduct "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 examine the borrower's sources of income, such as Social Security, pensions and investments. Borrowers must provide certain documents, such as tax returns and bank account statements.

Any credit trouble will have to be explained. The lender must determine whether the explanation qualifies as an "extenuating circumstance" in getting the loan approved.

The financial assessment determines whether the lender must set aside a certain amount of money to pay for property taxes and other expenses over the course of the loan. The "set aside" reduces the amount of loan proceeds available to the borrower.

To figure whether a set-aside is 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 the borrower passes the financial assessment, they can proceed with the getting the loan. If, however, the lender determines that the borrower does not have adequate cash flow, the borrower's loan application can be declined, or all (or most) of the available loan proceeds will be placed in a Life Expectancy Set-Aside and used specifically to pay property taxes and homeowners insurance for as long as those funds last. 

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.