Reverse / HECM Financial Assessment

Written By: Carlotta Emperator, Op-Ed Writer

In recent year, FHA has published updates to the rules that affect how to process a FHA Reverse Mortgage or Home Equity Conversation Mortgage.  This process is completed through what is a “Financial Assessment” that was added to the Reverse Mortgage effective date April 27, 2015.   FHA required each lender to process a prospective mortgagor on all HECM transaction type.

Some seniors were not able to pay their taxes and insurance after getting the loan.  Keeping the property taxes and insurance current is a requirement. When this requirement was not met, the senior was in default. 

The lender was required to perform a credit history analysis, perform a cash flow/residual income analysis, and document and verify credit, income assets and property charges.  The reason for these items, according to FHA, “is to determine if the mortgagor has demonstrated responsible management of debt, finances and home ownership obligations.   This solution should resolve this issue from the past of the senior not having enough income to maintain his/her responsibility for paying their own taxes and insurance. 

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Financial Assessment changed the Reverse Mortgage loan more than any changes in the history.  The impact has affected the industry due to a major decrease in volume.  The rules and guidelines have been a challenge for everyone.  Each assessment includes:
--- Evaluation of credit history
--- Evaluation of property charges payment history
--- Calculation of Residual income

There are several ways to qualify the borrower.  Their income is analyzed and all sources of income have to be proven. The assets of the borrowers have to be verified. The loan originator must work with the senior to find the best product that fits their financial needs and the best way for them to receive the proceeds. If the senior’s income does not qualify, then a hold back solution can be discussed. This hold back is called a LESA and money is reserved from the loan proceeds to pay the taxes and insurance.

An underwriter determine LESA based on approval outcome of the financial assessment, then the borrower either has no Life Expectancy Set-Aside, or Partially funded life expectancy set-aside or Fully funded life expectancy set-aside is required.

If a senior has a federal judgment or delinquent debt to the federal government, then the underwriter the mortgagor must make arrangement prior to closing to pay this debt in full or satisfactory repayment plan must be in place.  

Additionally, any delinquent federal debts or liens against the subject property that is taxes as “real estate” must not be in excess of the mortgagor’s net principal limit and if it, the mortgageor will need to have a separate source of funds to draw and pay this debt.
If the debt is a state debt or local loan, the rules are different.  The mortgagor is not required per FHA to satisfy an unpaid state or local court order debt prior to closing, although the lender may impose such requirement.  Most lenders also required if the borrower is in a payment arrangement that a min of 3 months of payment has been rec’d.  

There are many publications, job aides and information available to understand Financial Assessment.  Many lenders can provide this information to you upon request.  The HUD Mortgagee Letter 2014-21 and 2014-22 is necessary for understanding Financial Assessment and every loan originator should have a copy of this letter.As well as a Model HECM Financial Assessment and Property Charge Guideline that is dated March 2, 2015.

About The Author

Carlette Emperator a native of the sunshine state, Florida, has an extensive background in the mortgage industry. With 20+ years of experience, Carlette has held the title as a manager for closing, processing, and underwriting departments at several different organizations. Her ability to be a leader, a colleague, and a mentor has allowed her to continue to thrive within the mortgage industry leading her to become an instructor for Mortgage University®. Currently she is a full-time Senior DE/SAR Underwriter for a major lending institution. Carlette is the mother to a 26 year old daughter and a 21 year old son. In her spare time she loves to travel, spend time with family, and decorate her home in Atlanta, GA. Excited to have joined the Mortgage University® family she looks forward to working with all students and faculty. 

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.