Reverse mortgage financial assessment

Debt to income scaleThe Federal Housing Administration (FHA) requires reverse mortgage lenders to perform a "financial assessment" on every reverse mortgage applicant. The purpose of the financial assessment is to evaluate whether the applicant(s) has sufficient income and savings to pay ongoing expenses, such as property taxes and homeowners insurance, over the life of the loan. If the lender determines that the borrower does not have adequate income to pay the property expenses, the lender is required to set aside a certain amount of money from the reverse mortgage proceeds to pay for the property taxes and other expenses over the life of the loan. The "set aside" reduces the amount of loan proceeds available to the borrower. The set aside is known as a "LESA", Life Expectancy Set Aside.

To determine whether a set-aside is required, the lender subtracts the property expenses, debt obligations and other living expenses from the borrower's income and assets. The residual analysis also considers maintenance & utilities in the calculation. The monthly cost is based on 14 cents per square foot.

The "residual income" is the amount of money left over each month. The residual income must exceed the income guidelines based on the US area. There are two occupants in the following example and the borrowers just exceed the minimum guideline for two occupants.

Residual Analysis
Monthly income $2,400.00
less property taxes (monthly) $36.00
less homeowners insurance $40.00
less car payment $350.00
less credit card payment's) $350.00
less installment loan $450.00
less maintenance & utilities estimate $163.52
RESIDUAL INCOME $1,010.48

Residual Income by Region
Family Size Northeast Midwest South West
1 $540 $529 $529 $589
2 $906 $886 $886 $998
3 $946 $927 $927 $1,031
4 or more $1,066 $1,041 $1,041 $1,160

Region States
Northeast CT, MA, ME, NH, NJ, NY, PA, RI, VT
Midwest IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI
South AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK, PR, SC, TN, TX, VA, VI, WV
West AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY

Compensating Factors

But what happens if the expenses exceed the residual income guidelines?

Lenders are allowed to use compensating factors to offset the income deficiency. For example:

  • Debt obligations that will be eliminated as a result of the HECM;
  • An increase in monthly income through term or tenure payments; and
  • Imputed monthly income from the principal limit after taking into account the initial disbursement amount and payments to the mortgagor that occur during the first year disbursement period.

Life Expectancy Set Aside (LESA)

If the borrower is unable to meet the monthly income test and a LESA is required, the lender calculates how much money will be required to pay the property taxes, homeowners insurance, association fees and flood insurance cost, if required, for the life of the youngest borrower, or non-borrowing spouse. Needless to say, the set aside can be a substantial amount of money. The set aside is usually deducted from the reverse mortgage proceeds. The property taxes and other charges will be paid by the lender from the set aside.

Unfortunately, some LESA set aside amounts can exceed the reverse mortgage loan amount, in which case, the loan could be denied. Read more about the LESA

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