Stringent new ability-to-pay requirements for reverse mortgages insured under HUD’s Home Equity Conversion Mortgage (HECM) program go into effect on April 27, 2015. The new rules require HECM mortgagees to perform an in-depth financial assessment before making an HECM, far beyond what is required under current law. The new requirements are in response to a wave of HECM borrowers who have failed to pay their property taxes, hazard insurance premiums, and other types of “property charges.”

Credit history and cash flow analyses. Under the new requirements, HECM mortgagees must analyze an applicant’s credit history and debts to determine whether the applicant has demonstrated “the willingness to timely meet his or her financial obligations . . . .”  This analysis must include the applicant’s history of paying all “property charges,” a term that includes property taxes, hazard insurance premiums, association fees, and more. HECM mortgagees must also perform a cash flow/residual income analysis to determine whether the applicant has demonstrated a capacity to pay any documented financial obligations.

Extenuating circumstances and compensating factors. After performing credit history and cash flow analyses, HECM mortgagees may consider extenuating circumstances and compensating factors if an applicant would be disqualified due to credit or other financial issues. Eligible extenuating circumstances include the death of a spouse or divorce, unemployment, hospitalization, and more. Eligible compensating factors include income from a non-borrowing spouse, assets that would cover any property charges, access to other credit sources, and more.

“Property charge” funding requirements. If an applicant cannot demonstrate a willingness or ability to pay all costs related to the property, the HECM mortgagee must establish a “Life Expectancy Set-Aside,” requiring the mortgagee to withhold some of the HECM proceeds and pay all of the property charges on the borrower’s behalf. The amount of the set-aside is based on the results of the financial assessment as well as the calculated Projected Life Expectancy Property Charge Cost.

Read the HECM Financial Assessment and Property Charge Guide for all of the new requirements. (Note that the guide states an effective date of March 2, but that effective date has been extended to April 27 in a HUD Mortgagee Letter.)