Before approving a reverse mortgage, lenders are required to complete a financial assessment to ensure the reverse mortgage is a long-term sustainable solution. The financial assessment helps ensure borrowers can continue to pay ongoing home-related expenses—such as property taxes, homeowners insurance, and basic maintenance—throughout the life of the loan.
As part of the assessment, lenders look at the borrower’s income and savings. This may include Social Security, pensions, retirement accounts, investments, and bank balances. Borrowers will need to provide documents such as bank statements and tax returns.
Lenders also review credit history. If there have been past credit problems, the borrower will be asked to explain what happened. In some cases, issues caused by special or temporary situations—called extenuating circumstances—may still allow the loan to move forward.
To decide whether a set-aside is needed, the lender compares the borrower’s monthly income and assets to their ongoing expenses and debts. The amount left over each month—called residual income—is then compared to a government-established minimum, which varies by region and household size.
If the borrower passes the financial assessment, the loan can move forward without restrictions. If not, the application may be declined, or some or all of the available loan proceeds may be placed into a Life Expectancy Set-Aside (LESA). LESA funds are used specifically to pay property taxes and homeowners insurance for as long as the set-aside lasts.