In 2015, FHA adopted the “financial assessment” guidelines which were designed to stem the financial losses being incurred by their pool of reverse mortgage loans. These guidelines centered around evaluating the perspective borrower’s credit and cash flow. Prior to these new guidelines, almost every borrower over 62 and with adequate home equity would qualify for the loan. The intent was to prevent the high risk borrower from being approve for the loan, thereby eliminating the majority of the losses being incurred by the program.
Credit Considerations – The underwriter is now required to evaluate the borrowers’ debt payment history appearing on their credit report and possibly other sources. Specifically, the underwriter is to count both the number and type of late payments and when they occurred. Note that the FICO score is ignored. If the payment history is outside the guideline parameters and there is no legitimate extenuating circumstances, the borrowers will likely be required to “set–aside” a portion of the available loan to pay the property taxes and insurance for their life expectancy. Since nonpayment of taxes and insurance increases FHA’s risk of future loss, FHA wants assurances that the funds will be available to pay those amounts in the future.. This required “set–aside” can prevent a borrower from qualifying for the loan if their equity is not adequate to pay for the existing liens and the “set–aside”.
Cash flow considerations – Although previously ignored, FHA is now evaluating income coming into the household from all sources and the likely monthly disbursements, including all known expenses and estimates for property maintenance, food, utilities and other outflows known to be necessary to maintain a reasonable standard of living. If the remaining cash flow is inadequate, the loan may be declined or a partial or full “set aside” may be mandated. FHA’s concern is that there is not adequate cash coming in to pay for the known and expected expenses. Consequently, a reverse mortgage is not a solution, but only a temporary Band-Aid for the borrowers’ financial predicament. A more appropriate course of action would likely be to try to restructure their financial affairs to meet the guidelines or sell the property.