HECM Loan - Financial Assessment

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 13^th, 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.

Tip

If your HECM loan is being used to pay off existing debts, then the lender must take into account the decrease in expenses to calculate your residual income.

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.

Tip

Make sure that you have enough funds to cover all of your expenses. Prepare for your HECM counseling session. Check out Bills.com reverse mortgage counseling article and download a reverse mortgage checklist.

Bills Action Plan

The new 2013 HECM rules should help to protect the FHA from future losses, as well as protect you, the borrower, from taking a risky reverse mortgage. 

Here are some steps to take that will help you determine if a HECM reverse mortgage is the right loan for you:

1. 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.
2. Set out your monetary needs. Do you need money to repair the home, or make it appropriate for any special needs?
3. 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.
4. 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.