Until recently, homeowners who were at least 62 years old could tap the equity in their home through a reverse mortgage with little, if any, consideration of their personal financial situation.
But no more.
New federal-government guidelines now require an assessment of each prospective borrower's income, assets and debts, explains Eric Meehan, owner of Golden Opportunity Mortgage in San Diego.
"No longer is it just age, equity and the value of the home and based on life expectancy," Meehan says. "On top of that, they take a look at your monthly income and assets versus your revolving debt. They want to know your monthly payments, taxes, insurance, credit cards - any other monthly debt that you pay."
Taxes, insurance
The goals of the financial assessment are to stabilize the reverse mortgage loan program and ensure that borrowers have the ability and willingness to pay their property taxes and homeowner insurance premiums, says Beth Paterson, a certified reverse mortgage professional with Reverse Mortgages SIDAC in St. Paul, Minnesota.
Historically, some homeowners tapped their equity and then stopped paying their taxes and insurance, leaving lenders to pick up those expenses to protect their own investment in the property. If the homeowner wasn't able to reimburse those costs, the lender could foreclose, triggering a mortgage insurance claim through the Federal Housing Administration.
"With the financial assessment, we're looking to make sure homeowners will be able to pay property taxes into the future," Paterson says.
No medical review
The financial assessment is "a good thing" for consumers, but doesn't go far enough to determine whether a reverse mortgage is suitable for them, says Sandy Jolley, a reverse mortgage consumer advocate in Oxnard, California.
"The big thing that's missing is anything that talks about the consumer's health and personal needs," Jolley says. "When one out of two people reaching the age of 80 is going to need long-term care, if they're taking out a reverse mortgage at 78, they have a health issue and they pass this financial assessment, they could still lose their home."
Introducing LESA
Homeowners who've experienced financial difficulties might still qualify, but could be subject to a life-expectancy set aside or "LESA." This amount is part of the mortgage, but is reserved for the lender to pay the homeowner's property taxes and homeowner insurance.
A homeowner who has no other mortgages and a credit history without late payments might not be required to have a LESA. Those whose situation is borderline will be required to have either a full or partial LESA, Paterson explains.
This requirement means those homeowners won't get access to as much unrestricted money.
"Things like tax delinquencies or late payments on revolving credit could impact what they're eligible for," Meehan says.
Documentation
To complete the financial assessment, borrowers will have to provide documentation of their income, assets and debts. Examples might include paycheck stubs or W-2s for those who are employed, Social Security or pension awards for those who are retired, bank or investment account statements and individual or business income tax returns. A credit history will also be reviewed.
The lender will use the documentation to perform a residual income analysis, intended to assess how much money the borrower has each month to pay household expenses.
The required residual varies depending on the borrower's geographical area and household size.
Meehan offers an example: "A family of one: in the Northeast, it's $540. In the Mid-west, it's $529. In the South, it's $529. In the West, it's $589."
Lenders have some discretion to consider extenuating circumstances, such as the loss of a job, death of a spouse or medical expenses.
Paterson says guidelines for these exceptions vary, so "it may make a difference from lender to lender" as to whether a loan will be approved.
Jolley says giving a lender such discretion is "very very dangerous" for consumers because the loan officer is essentially a salesperson who's not qualified to give financial or legal advice.
The bottom line
Despite her misgivings, Jolley still believes the financial assessment is "a good step."
"The people who are most at risk and have the most to lose will not be able to get a reverse mortgage," she says.
Paterson also says fewer people will qualify, but she suggests that homeowners who want a reverse mortgage should still inquire.
"Call and ask," she says. "Don't just write it off and say, 'No, I am not going to qualify.'"
