The 2015 Financial Assessment (FA) requirement changed reverse mortgage underwriting fundamentally. Prior to FA, borrowers were not evaluated for ability to pay ongoing property charges. The default wave that followed loans from that era led HUD to require a minimum residual income analysis for all HECM loans.
What Financial Assessment Evaluates
- ✦Credit history: Review of all credit obligations, focusing particularly on property charges (taxes, insurance, HOA) paid on time. Late property charge payments in the past 24 months are significant derogatory indicators.
- ✦Residual income: The borrower's income after all recurring obligations must meet HUD's residual income thresholds, which vary by family size and region.
- ✦Cash flow analysis: Documentation of income sources and their sustainability.
Residual Income Thresholds
HUD publishes residual income tables by region and family size. The numbers are materially lower than VA residual income requirements but serve a similar function. A borrower who falls below the residual income threshold for their household does not automatically fail FA; the lender evaluates compensating factors and may require a set-aside for future property charges.
Life Expectancy Set-Aside (LESA)
When a borrower fails Financial Assessment on income or credit grounds, HUD requires a LESA -- a funded set-aside from the HECM proceeds that will be used to pay future property taxes and insurance on the borrower's behalf. A LESA reduces available net principal limit but allows the loan to proceed. There are two types: a fully funded LESA (required for poor credit history) and a partially funded LESA (for borderline income situations).
Aria on vicariointel.com can walk through HECM Financial Assessment requirements, LESA calculation, and what borrower scenarios require set-asides.
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