The Federal Housing Administration has issued guidance on the financial assessments lenders must conduct before qualifying seniors for an agency-insured reverse mortgage.
The financial assessment is designed to ensure seniors that take out reverse mortgages, which FHA calls Home Equity Conversion Mortgages, will be able to turn the equity in their homes into a financial cushion and continue to live comfortably in their homes.
The National Reverse Mortgage Lenders Association welcomed FHA’s release of the new guidance and model loan documents.
“We are always concerned about protecting those aging Americans who cannot afford to meet the responsibilities of reverse mortgage loans,” said Peter Bell, the president of the group, in a press release.
“Financial assessment will help determine if the product is right for the potential borrower. By implementing this process, HUD is responsibly making the HECM a safer product.”
During the worst of the recession, many seniors used reverse mortgages as a life line to prevent foreclosures. They later defaulted on their loans when they couldn’t afford to pay their property taxes and maintain hazard insurance on the houses. As a result, the reverse mortgage program has been a drain on FHA’s insurance fund.
In August 2013, Congress passed a reform bill that requires lenders to conduct financial assessments along with other changes to help stabilize the FHA’s reverse mortgage program.
According to the FHA guidance, lenders must evaluate the borrower’s “willingness and capacity to timely meet his or her financial obligations and to comply with [HECM] mortgage requirements.”
Lenders must also consider that “some seniors apply for HECMs because of financial difficulties,” according to the FHA letter dated Nov. 10.
The new financial assessments are mandatory starting March 2, 2015.