The goal of the changes in the reverse mortgage process is to reduce defaults on reverse mortgages by making sure borrowers have the financial capacity to pay their ongoing property tax and home insurance obligations.
In fact, this was the very subject of a recent Houston Chronicle article titled “Mortgage: What reverse mortgage financial assessment means to you.”
So, what are these two new steps in the process?
First, conduct an assessment of your finances. This includes your credit history and income.
Second, 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.
When do the changes take effect? They are effective for reverse mortgages issued on or after April 27, 2015.
These requirements are designed to decrease the default rate on reverse mortgages.
This has been a big problem.
Some 12% of reverse mortgages were in technical default in 2014 alone.
This means borrowers failed to pay taxes or insurance or both.
In addition, borrowers had no proceeds remaining from their reverse mortgages.
Not good.
According to a recent (2016) study from Boston College, the new rules could reduce reverse mortgage default rates by as much as half.
That is good.
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 is not 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.
I trust that answers your question.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: Houston Chronicle (Sept. 16, 2016) “Mortgage: What reverse mortgage financial assessment means to you”