So you’ve researched the reverse mortgage for months. You’ve got the support of your kids. You’ve talked to allll your friends. You’ve decided the reverse mortgage is right for you.
It’s time to make sure you meet the FHA requirements.
If there’s something you’ll learn about me through my blogs, it’s that I don’t like to put you to sleep with useless jibber jabber.
ZZZZZZZ (that’s you sleeping after reading 99% of reverse mortgage articles online).
I like to give you the most “bang for your buck.”
I want to give you solid information, with the least amount of words possible. I hope you’re okay with this. You can obviously call me anytime if you’d like to talk about current events and/or how much you love to watch Jeopardy. HAHA!
Let’s jump in to why you’re here – “Do you qualify for a reverse mortgage?”
The first, most basic requirement is that all borrowers on title must be at least 62 years old at settlement. The older the youngest borrower is, the more proceeds are available. The FHA calculation assumes the youngest borrower will live to their 84th birthday. So the closer you are to 84, the more equity you’ll get.
P.S. – Don’t worry if you’re over 84 years old. You’ll still qualify. You’ve just lived longer than FHA thought you would. 🙂
Income and Credit
In 2015 FHA made some MAJOR changes to the reverse mortgage – called “Financial Assessment.” Prior to these changes, it didn’t matter how much income a borrower received and/or if they had bad credit. The loan was based on the equity in the home and no payments were required.
Sounds a little crazy that they wouldn’t be worried about a borrowers income and/or credit….doesn’t it?
When a borrower does a reverse mortgage they are not required to make a monthly principal and interest payment. They are however, required to pay their property taxes, homeowners insurance, utilities, general upkeep, etc.. These are expenses that a borrower will always have to pay. With our without a mortgage.
The income requirements are not like a normal “conventional” loan where the lender calculates what’s called “debt ratios.” On a reverse mortgage, the lender uses whats called “residual income.” Residual income is an amount of money that’s left over every month after expenses are paid (minus the mortgage payment, because there are none with a reverse mortgage).
To keep it simple (because I’m a simple person), living in Maryland or any other state FHA classifies as “South”, a one person household will need to show at least $529 per month in residual income. This amount goes up based on additional household members. We can use Social Security, Pension, full-time job, part-time job, rental income, savings accounts, mutual funds…..Just about any income source can be used.
In reference to the credit, FHA does not have a minimum credit score requirement. We’re looking at all debts appearing on your credit report, and mainly for the last 2 years (but all credit regardless of age will be considered). MOST IMPORTANTLY, we’re looking at how the property taxes have been paid.
There aren’t many things that can “bump” a lender out of holding a first lien on a property, but defaulted property taxes are one of them.
If taxes have NOT been paid on time over the last 2 years, that doesn’t automatically mean a borrower is turned down.
It means that you’ll probably require a LESA (life expectancy set aside). This is just FHA’s fancy term for an escrow account. This account is established on day one and the property taxes and homeowners insurance are held back with in the reverse mortgage to pay these expenses for the borrower moving forward. The LESA is only mandatory if the borrower doesn’t meet the credit requirements. It’s optional for borrowers that meet all the requirements.
A lot of our clients like the concept of the LESA because the lender handles the tax and insurance payments moving forward. The problem we see with borrowers that require a LESA is the amount of equity they have in the home.
Which leads to the final piece of the qualification (there are other requirements, but remember I’m trying to be my “simple self” for fear of putting you to sleep).
In order to qualify for a reverse mortgage, a borrower is going to need APPROXIMATELY 45-50% equity in their home. What does this have to do with borrowers requiring a LESA and them possibly NOT qualifying??
Let’s keep numbers very simple and assume a borrower has a $200,000 home and based on their age, they qualify for 50% of the value. This would mean they could access approximately $100,000. If this person had a current mortgage balance of $100,000 AND required a LESA, there wouldn’t be enough equity to qualify. The reverse mortgage MUST pay off all liens and be in first lien position.
In all the reverse mortgages I’ve personally done over the years (and it’s been quite a few), the vast majority of reverse mortgage borrowers have a lien currently on their home.
The primary purpose for them doing the reverse mortgage is to eliminate their monthly mortgage payments. If there’s some additional cash left over, great. If not, no big deal. Just eliminate that payment, and life is great.
I emphasize the “vast majority” of my clients have a mortgage currently, but not all of them do. Some of our borrowers are using the reverse mortgage as their safety net and don’t have an immediate need for the funds. They’d set up a line of credit with in the reverse mortgage and only use it when needed.
I’ll get in to the different payment options in another post.
Your eyes are already starting to get heavy, so I should stop now.
If you’re looking to get an estimate for how much you qualify for, please use our payment calculator by clicking here.
You can close your eyes and go to sleep now. 🙂