Understanding How a Reverse Mortgage Can Keep You at Home Longer As You Age (Part 1)

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Elder Care Attorney

In recent years, the U.S. Department of Housing and Urban Development (HUD) has made significant changes to the reverse mortgage program. As a result The Home Equity Conversion Mortgage (HECM), (aka reverse mortgage) looks very different today than it used to. Three significant regulatory changes have occurred. These changes include new “financial assessment” underwriting criteria, enhanced non-borrower spouse protections, and new lien seasoning requirements. In addition to these regulatory reforms, some lenders have significantly lowered the costs of obtaining an HECM.

Financial Assessment

“Financial assessment” is a term describing new credit and income underwriting criteria to assess the suitability of an HECM for each applicant’s financial situation and to reduce the number of mortgage defaults caused by nonpayment of property taxes and homeowners insurance. HECM lenders must now analyze each applicant’s credit history, property tax and insurance payment history, and residual income to determine the homeowner’s ability via (income) and willingness (credit) to meet his or her loan obligations. Those that don’t meet certain HUD thresholds will encounter new “Life Expectancy Set Asides”. Escrowing a portion of their HECM proceeds for future property tax and insurance payments in case they default or, in extreme cases, have their HECM application denied.

HECM applicants must demonstrate “satisfactory” credit in their housing payments and installment debt payments being on time for the last 12 months. Their property taxes, homeowners insurance, and any applicable condominium or homeowner association fees must be current. Homeowners can present supporting documentation to explain extenuating circumstances that were beyond their control and led to an identified credit or financial problem. Examples of extenuating circumstances include unemployment, reduced work hours, medical emergencies, divorce, a spouse’s death, and emergency property repairs not covered by insurance. The lender will then make an assessment to determine the likelihood of a certain credit problem repeating. You must also demonstrate adequate income to pay monthly financial obligations.

If a residual income shortfall exists, the lender will consider compensating factors such as overtime, bonuses, part-time or seasonal employment, non-borrowing spouse income, or the fact that the homeowner will begin receiving pension or Social Security payments within the next 12 months.

When an applicant demonstrates unsatisfactory credit or property expense payment history, the lender must then establish a fully funded “default fund” known as a LESA. The fully funded LESA’s size is based on the property tax and insurance payments that the lender expects the borrower to make over his or her life expectancy. Fully funded LESAs are much larger than their partially funded counterparts and the lender disburses tax and insurance payments from the LESA directly to the borrower’s insurance agent and taxing authority. The larger the LESA the less immediate access to the equity in the home.

To discuss your NJ ­­­­­­­­­­­­­­­­­­­­­­Elder Care matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.