The FHA, who issues Reverse Mortgage eligibility tightened standards, effective March 1st 2015.
The changes are in addition to earlier reductions in maximum financing amounts that have resulted in sharp declines in the numbers of new loans being made.
Under the original rules, applicants were not required to pass the typical underwriting tests associated with home mortgages. As an extreme example, a home owner over 62, with equity in his home, who is just days away from trust deed sale, could qualify for a cash out reverse mortgage! All he needed was sufficient equity in his home and was required to sit through a brief financial counseling session.
FHA now requires all applicants to undergo a “financial assessment” similar to the underwriting process used for standard mortgages.
Lenders now check:
• Credit reports, from all three national credit bureaus.
• Payment histories on property taxes, HOA fees and hazard insurance premiums.
• Income from regular and part-time employment, Social Security, pension funds, regular draws on IRAs and 401(k) accounts, plus any earnings on investments.
• Recurring household debt obligations.
Information such as car loans, alimony, credit cards, medical bills, are required in order to come up with a cash flow and “residual income” analysis.
If applicants appear marginal on these tests, Lenders will be allowed to take into account any “extenuating circumstances,” such as an unexpected hospitalization or illness that temporarily cut off income and led to late payments.
If applicants appear unlikely to make on-time payments for property taxes or hazard insurance premiums, Lenders can reject them or set aside potentially large chunks of their cash proceeds (impounds) for later payments.
These impounds, in turn, will reduce the effective cash many borrowers receive from the reverse mortgage.
Contact a local banking institution for the latest information.
Written by Daniel Dobbs
Daniel Dobbs has a Real Estate blog, DanielDobbs.org that attracts over 50k readers a month.