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In an effort to protect reverse mortgage borrowers from falling behind on the tax and insurance payments associated with their loans, lenders are beginning to take a closer look during the application process at whether borrowers can and will pay their property charges throughout the course of their reverse mortgage loan.
While it’s not likely to add much in the way of time or steps to applying for a reverse mortgage, many lenders will be adapting their underwriting processes to ensure that borrowers are able to stay current on their tax and insurance property charges.
In the past, borrowers were not required to provide documentation of their tax and insurance payment history when applying for a new reverse mortgage loan. Now, lenders may look at an applicant’s history of mortgage payments within a certain time span on his or her previous mortgage, as well as bankruptcy and foreclosure history and whether there are outstanding judgment’s or tax liens.
One of the new parameters also will be that borrowers who need to utilize 100% of their funds immediately (i.e. to pay off an existing mortgage) will most likely not qualify without very strong compensating factors.
Lenders may also conduct a quick assessment of what a borrower’s financial situation will look like after he or she receives a reverse mortgage loan, to ensure that the borrower can reasonably make his or her tax and insurance payments.
The National Reverse Mortgage Lenders Association (NRMLA), the trade association for reverse mortgage lenders, recently released guidance encouraging reverse mortgage lenders to conduct such an evaluation that assesses applicants’ capacity, or ability, to pay monthly property charges. This test looks at monthly cash flow, after tax and insurance fees have been subtracted from overall income.
Applicants may also be tested on three conditions for their willingness to pay ongoing property charges:
- Lenders may check to see if prospective borrowers have delinquent real estate taxes during the 12 month period prior to their loan application date.
- Lenders may also examine whether or not applicants are able to provide evidence of homeowners’ hazard insurance coverage in-force at least 90 days prior to applying for a reverse loan.
- Lenders may determine how much funds applicants will need to use out of what’s available to them through the loan, as opposed to how much the borrower chooses to use. This is calculated by adding mandatory payoffs of liens against the property (such as an existing mortgage), past-due property charges, mandatory payoffs of outstanding judgments, and the sum set aside for property repairs, and then dividing this amount by the available loan proceeds.
Reverse mortgage originators are also allowed to review additional willingness conditions if considered appropriate.
Depending on the outcome of the Capacity Test, and the results of the three conditions, reverse mortgage lenders can either decline a borrower’s application, proceed with the loan, or consider other factors.
The new measures are in place to ensure borrowers can remain current on their loan obligations, thus keeping the borrower in his or her term for the duration of the reverse mortgage.
“Reverse Mortgage Guidelines” by www.allrmc.com
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Tags: reverse mortgage guidelines, Reverse Mortgage Qualifications & Underwriting, reverse mortgage tax defaults
My mother got a reverse mortgage about 2-years before she died. I was about to transfer the balance of the loan, 27K when she suddenly died. I am told there is no way to recieve the balance of this loan. We need this money to pay off the nursing homes that she stayed in off and on the last two years of her life. (She suffered two broken hips and several fractures to her back so stays in rehabs was common). I am shocked that the balance is not available. This means that even with the poor economy, that the bank will make over 50K on her loan. Our only option is the sign the house back to the bank since there is no money to continue to maintain it while we try to sell it. It also means that the 20K that is owed for her medical bills will go unpaid and I will be out personally 6K that I put into the house to do repairs so it could be sold. Is there any kind of a law that would protect me so I could get the balance of that loan and pay her debts? I honestly don’t know were the money is coming from.
Darlene,
The reverse mortgage is a loan to the borrower(s) who occupy the property for life and is like any other loan in one respect…no one other than the borrowers can access the funds. If the property is worth more than is owed on it, then the borrowers heirs can sell the home and keep any proceeds above and beyond the loan balance owed. If the home is worth less than the amount owed, then the heirs have the option of purchasing the home for 95% of the current appraised value (regardless of what is owed on the current mortgage) or letting the property go back to the lender without ever having to worry about a deficiency judgment – they can never owe more than the property is worth and the lender can never go after other assets to satisfy the reverse mortgage.
Also, if you are making an effort to sell the home, the lender and all the servicers with whom I have ever spoken are more than willing to work with you. The last thing the lender wants is the property if you can sell it and if there is still another $50,000 to be made, you may want to lower the asking price a bit for a quick sale. However, once the original borrower(s) on a reverse mortgage have passed, the loan is no longer available to others to access. If there is still equity in the property, it belongs to the heirs, however, the program is not and never has been designed to continue to allow for withdrawal of funds after the borrowers pass.