The goal of the change in the reverse mortgage process is to reduce defaults on reverse mortgages by making sure borrowers have the wherewithal to pay property taxes or home insurance.
A recent article in the Houston Chronicle’s, “Mortgage: What reverse mortgage financial assessment means to you,” discusses the steps to determine reverse mortgage eligibility.
First, conduct an assessment of your finances, especially your credit history and income; then set aside part of the mortgage proceeds (based on that financial assessment) to help cover estimated tax and insurance payments over the expected life of the youngest borrower. These changes are effective for reverse mortgages issued on or after April 27, 2015.
These requirements are designed to decrease the default rate on reverse mortgages. Roughly 12% of reverse mortgages were in technical default in 2014, so borrowers hadn't paid taxes or insurance or both. In addition, borrowers had no proceeds remaining from their reverse mortgages.
A recent 2016 study from Boston College found that the new rules could reduce reverse mortgage default rates by as much as half.
The financial assessment includes an analysis of the borrower's credit history, including any foreclosures, defaults, late mortgage payments, and late payments for property charges.
Research reveals that a prospective borrowers' credit scores are big predictors of their likelihood to default on reverse mortgages. It examines income from employment, self-employment, Social Security, alimony, child support, military income, pensions and retirement accounts. If the lender sees that the borrower isn't willing or able to make tax and insurance payments, a portion of the mortgage proceeds will then be set aside to cover these future costs.
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Reference: Houston Chronicle (Sept. 16, 2016) “Mortgage: What reverse mortgage financial assessment means to you”