One of the biggest misconceptions about reverse mortgages is that because there is no required monthly mortgage payment, there are no housing expenses. That’s simply not true.
You must still pay your:
- Property taxes
- Homeowners insurance
- Basic maintenance of the home
Failing to keep up with those obligations can still lead to foreclosure, just as it can with a traditional mortgage.
Why the Financial Assessment Exists
The government-insured Home Equity Conversion Mortgage (HECM) program added the financial assessment to protect both borrowers and lenders.
Years ago, some seniors received a reverse mortgage, spent much of the money, and later found themselves unable to keep up with increasing property taxes or insurance premiums. The result was heartbreaking. Some ultimately lost their homes.
Today’s financial assessment helps reduce the chance of that happening.
What the Lender Reviews
The lender looks at:
- Your income
- Your credit history
- Your payment history
- Your ability and willingness to continue paying property taxes and homeowners insurance
The goal isn’t perfection. It’s determining whether you can comfortably handle your ongoing housing expenses.
Three Possible Outcomes
1. Full Approval
If your income and financial profile demonstrate that you can comfortably pay your taxes and insurance, you’re approved without additional requirements.
2. Life Expectancy Set-Aside (LESA)
If your income is a little tight, don’t panic. That doesn’t automatically mean your loan is denied.
Instead, the lender may establish a Life Expectancy Set-Aside (LESA). A portion of your reverse mortgage proceeds is reserved specifically to pay future property taxes and homeowners insurance.
Think of it as putting your taxes and insurance on autopilot. While it reduces the cash available to you at closing, it provides valuable peace of mind and helps ensure those critical bills are paid.
3. Denial
In some cases, if cash flow is insufficient and there is a significant history of unpaid obligations without reasonable explanations, the loan may be denied.
The Good News
A financial assessment isn’t something to fear. It’s there to help borrowers remain successful homeowners for years to come.
After all, the best reverse mortgage is the one that allows you to enjoy your retirement without worrying about whether you’ll be able to stay in the home you’ve worked so hard to own.
Because retirement should come with fewer worries… not more.
