If you’re tapping into your home equity through a reverse mortgage, you have probably heard by now about the new reverse mortgage “financial assessment” that is soon to be part of the process of getting a government-insured Home Equity Conversion Mortgage (HECM).
How the HECM Calculation Works
According to ARLO: “The Principal Limit or loan amount you can receive as stated above is dependent on several factors. Borrowers ages, interest rates, property values or HUD lending limit whichever is less on the HUD Home Equity Conversion Mortgage (HEMC or “Heck-um”) and these items as well on the jumbo programs but then the program parameters instead of the HUD lending limits on the jumbo or proprietary programs.”
New Financial Assessment Rules
The financial assessment, which is like the assessment that a “forward” loan originator conducts for traditional mortgage borrowers, is being introduced this year as an extra safeguard for borrowers.
On a basic level, the financial assessment takes a detailed look at your financial situation including your income, debts, credit history and other financial health measures, to determine that you’ll still be able to pay for your mandatory obligations after you get a reverse mortgage.
Under the terms of all HECM reverse mortgages, the borrower must continue to pay property tax and homeowners insurance premiums, for example, and the financial assessment’s goal is to make sure that as a borrower, you’ll still be willing and able to meet those property charges.
But the financial assessment is not black and white. Your lender will collect information from you, ask some follow-up questions, and make one of a few determinations based on the assessment:
Yes, you qualify
No, you don’t qualify
Maybe, you might qualify
If you fall into the “maybe” category, there’s one tool that can help lead to your qualification. It’s called a set-aside.
Software Framework to Force Set-aside
Think of a reverse mortgage set-aside as a designated pool of money that is budgeted upfront for your expenses down the road. If you have had a traditional mortgage, you might have escrowed, or set aside, funds for your future property taxes.
The reverse mortgage set-aside is similar, but if you require a set-aside, it will be calculated based on how much you are likely to need for the rest of your life.
Do I need a set-aside?
No, if: Your credit history and property charge payment history are deemed satisfactory, and your residual income as determined by the lender meets the standard. (You can also opt for a set aside if you choose, on a voluntary basis, and will be held to this set-aside for the life of the loan.)
You do not have satisfactory credit history and/or
You do not have a satisfactory property charge payment history, and/or
You do not have adequate residual income
How does the lender calculate the set-aside?
If you require a set-aside, your lender follows a formula to determine the amount you’ll need. That formula includes:
The sum of the following:
– Current property taxes
– Current homeowners insurance premiums
– Flood insurance premiums
A factor reflecting any increase in rates of tax and insurance
The expected mortgage insurance premium rate both for the upfront MIP and the ongoing, annual MIP
Life expectancy of the youngest borrower
Partial versus fully funded set-asides
Depending on the results of your financial assessment, your lender will determine whether you require a fully funded, or partially funded set-aside. Ask your lender if one of these scenarios applies to your situation and how it’s likely to impact the amount you can receive from your loan.
HUD Technology Problem:
Information Technology (IT) plays a critical role in the Department of Housing and Urban Development’s (HUD) ability to carry out its mission of encouraging home ownership and spurring community development. Each year the complexity of the IT environment grows, and making sound IT investment decisions requires greater amounts of information.
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