HECM Loans - Borrower Requirements
Editor's Note: In September 2013 the FHA announced huge changes in their Home Equity Conversion Mortgage (HECM) reverse mortgage rules. The changes are designed to shore up the FHA's losses and protect borrowers from taking reverse mortgages that endanger their financial situation. In order to help you understand the changes, read the two-part series about HECM loan changes in 2013, as follows:
- The first article deals with changes in the amount of money available in the HECM loan program, including the overall loan size and the amount you can draw down during the first 12 months of the loan. These changes go into effect September 30, 2013.
- This article deals with new requirements that the lender must make regarding checking the borrower’s credit and capability to maintain essential payments regarding the property. These changes will go into effect January 13, 2014.
You don't need to make monthly payments on your HECM loan. In fact, if used properly, a reverse mortgage loan can be a valuable source of income. However, if you are not careful a reverse mortgage can be dangerous.
Since many borrowers misused the HECM loan, the FHA issued big changes in the reverse mortgage rules. Besides limiting the amount of loan you can borrow, the new rules also require stricter lending requirements.
Here are the major changes in the HECM loan that will go into effect for loans assigned on or after January 13, 2014:
- Credit Report Check
- Financial Assessment
- Setting Aside Funds for Property Charges
Change #1 to HECM Loan - Credit Report Check
Remember, if you don’t keep up on your property taxes, homeowner insurance, or proper maintenance of your home, then the lender may require you to pay back your HECM loan.
We are all used to lenders checking our credit reports and credit scores. However, for many years a credit check for a HECM loan was not an issue. After all, you don’t have to make monthly payments - HECM loans are based on your age, the interest rate and your property’s value.
Well, get ready for changes, as the FHA now requires lenders to check your credit reports. These are some of the basics of the HECM loan credit check:
- Who to check?:
Lenders must check all borrowers and non-borrowing spouses if they reside in community property states.
- Why make the check?:
In a regular mortgage loan the lender checks your debts in order to determine if you have enough income to pay your debts as well as your mortgage. The new HECM rules now require the lender to check your credit and see if you have enough income to pay your debts and property related charges.
- How to check?:
Lenders must know review your credit history from the three major Credit Reporting Agencies. Depending on your situation lenders will require various documentation to verify your payment history
- What to look for?:
The new HECM loan rules now make the lender check your debts and monthly payments in order to:
- Look for delinquent or unpaid debts including federal debts, liens against the property and unsatisfactory/late payments on your mortgage and other credit.
- Specifically look for timely payments on any payments related to your property including property tax and insurance.
Change # 2 to HECM Loan - Financial Assessment
Before you start shopping around for a HECM loan, take a good look at your financial situation. Make sure you know how much your home is worth, your monthly expenses and your monthly income. A HECM loan, if used properly, can be a great source of income that will allow you to comfortably live in your home.
Starting January 13th, 2014 reverse mortgage lenders will be required to make a thorough financial analysis of all HECM loan borrower.
- Why make the check?:
The lender must make sure that the borrower has the ability to meet all of their financial obligations.
- What to check?:
The lender must make a thorough check of al your:
- Income: This includes traditional income (salary, employment, rental, pension, VA, and Social Security) and asset based income (checking account, retirement account, annuities, non-retirement investment accounts)
- Expenses: This includes your taxes (Federal and State), property charges (taxes, insurance, mortgage), estimated utility and maintenance, installment credit charges, revolving credit, and court ordered payments.
- The Results - Your residual income?:
The FHA is using existing VA tables to determine if your income is sufficient to meet your monthly obligations. The lender must verify all of your income and expenses, using complicated rules and formulas. Don’t be afraid to ask the lender to explain to you the calculations.
Change # 3 to HECM - Property Charge Funding Requirement
One of the main reasons that the FHA made changes in the HECM loans was to make sure that borrowers would not fall behind on their essential property charges.
Here are some of the basics about the new HECM loan property charge:
- What is Included?:
The lender can only include your real estate taxes, hazard insurance and flood insurance.
- Who is Included?
Based on the financial assessment the lender must determine if a set-aside is required.
- What type of set-aside?:
If you are required to make a set-aside, then the lender can choose between a one time Life Expectancy (LE) set-aside or an authorized monthly payment from your monthly HECM payment or line of credit.
Here are some steps to take that will help you determine if a HECM reverse mortgage is the right loan for you:
- Prepare your budget. Pay special attention to all of your housing costs, including property taxes, property insurance, and household maintenance expenses. In addition take the time to analyze your assets and liabilities.
- Set out your monetary needs. Do you need money to repair the home, or make it appropriate for any special needs?
- Learn about how a reverse mortgage works. Make sure that a lender thoroughly explains you choices, the amounts of money available to you, and the fees you will have to pay.
- Be careful before taking a reverse mortgage. Don’t use the money frivolously. Take as little as possible up-front and don’t waste it on an extravagant vacation or a risky investment. Make sure that you will have funds available when you really need them.