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 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


HECM program pros and cons - There are PRO's and CON's to the HECM loan program. Read more

How much money do you get from a reverse mortgage? - The total mortgage amount is first limited by the value of the house (or condominium) and the maximum loan limit. Read more

Reverse mortgage with bad credit - The Mortgagee (Lender) may consider the Borrower to have satisfactory credit if: the Borrower has made all housing and installment debt payments on-time for the previous 12 months and no more than two 30-day late mortgage or installment payments in the previous 24 months; and the Borrower has no major derogatory credit on revolving accounts in the previous 12 months. Read more

Reverse Mortgage Counseling and Education - Did you know that borrowers required to complete a counseling session prior to making mortgage application? Read more

Reverse mortgage financial assessment - Lenders are required to determine if you can meet your monthly payment obligations. Read more

Reverse mortgage to purchase a home - Did you know that you can purchase a home with a reverse mortgage? Read more

Reverse mortgage payment options - There are six different ways you can receive the proceeds from a reverse mortgage. Read more

Can you sell a house with a reverse mortgage? - The dilemma of selling a home occurs when the sales price is less than the loan balance. Read more

What is an HECM loan? - A HECM is a reverse mortgage. Read more