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Reverse Mortgage Residual Income Requirements

Debt to income scaleEvery reverse mortgage applicant is required by the Federal Housing Administration (FHA) to undergo a "financial evaluation."
The financial assessment is used to determine if the applicant(s) has enough income and resources to cover recurring costs such as property taxes and homeowner's insurance during the loan's term.
If the lender decides that the borrower does not have sufficient income to cover property costs, the lender is obliged to put aside a portion of the reverse mortgage profits to cover property taxes and other obligations throughout the loan's duration.
The amount of loan profits accessible to the borrower is reduced by the "put aside."
A "LESA," or Life Expectancy Set Aside, is the name given to the set aside.

Monthly premium cancellation is only available for active risk-based cases that were closed after December 31, 2000 and given a case number before June 3, 2013, and that satisfy the criteria outlined in the policy.

The amount of money left over each month is referred to as "residual income."
The leftover income must be more than the US area's income requirements.
In the following example, there are two occupants, and the borrowers barely surpass the two-occupant minimum standard.

Residual Analysis
Monthly income $2,400.00
less property taxes (monthly) $36.00
less homeowner's 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:

  • Obligations that will be cancelled as a consequence of the HECM
  • Increased monthly revenue from term or tenure payments; and
  • Imputed monthly income from the principal limit after deducting the initial disbursement amount and payments to the mortgagor made during the first year of distribution.

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, homeowner's 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