Will Reverse Mortgage Underwriting Disqualify Borrowers With Boarders?

With new underwriting requirements emerging among reverse mortgage lenders that consider a borrower’s income and credit history, a particular segment of the reverse mortgage borrowing population may become ruled out: those who rent rooms or space to family members or others but don’t declare the rental income.

While hard data on the phenomenon is hard to come by, several brokers and lenders told RMD that it’s a common occurrence that they encounter when walking borrowers through the reverse mortgage process. Potential borrowers may receive a portion of their income by housing a tenant, sometimes a person who might help the senior with yard work, errands or house keeping, allowing the senior to stay at home without having to pay for expensive service providers to help out.

“We definitely have see an uptick in interest from homeowners from when the surge began in 2008,” says Rebecca Sheppard, program director for homesharing at St. Ambrose Housing Aid Center in Baltimore. Sheppard also serves as co-president of the National Shared Housing Resource Center. In the Baltimore area where Sheppard is based, the homesharing concept appeals largely to the 50+ female population, Sheppard says. It works for people who don’t need regular medical care, but seek comfort or companionship by living in shared housing rather than alone.

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The program at St. Ambrose will help homeowners with lease agreements and other assistance, but it doesn’t determine whether a homeowner, often a senior, collects rent or claims it.

With respect to these seniors and the new underwriting requirements implemented this month by MetLife and others expected to follow, strict debt-to-income ratios or residual/disposable funds qualifications raise some concern, says Ken Klawans, president of Owings Mills, Maryland-based iReverse Home Loans. “There are many seniors that may not qualify based on those standards, however have either unclaimed income (i.e. boarders, side jobs) or receive family assistance when needed.”

Other originators told RMD the concept of taking in boarders is a common practice they see as well, the concern being that prior to a financial assessment of borrowers, the borrower would qualify for the reverse mortgage and could use it in combination with the rental income toward living expenses, home maintenance and upkeep.

“I have a client that owns a second home that her daughter and son in law live in,” said Jack Belles of Reverse Mortgage of New England. “We cannot document rental income from the daughter to the mother, so you have to count the taxes and insurance on that second property (the property is free and clear) against the ratios of the client.”

The situation is not uncommon among those applying for reverse mortgages.

“It’s a widely publicized trend,” Klawans says.

But lenders in the forward market have responded to home sharing on the flip side, by allowing income from renters as a means to help homeowners out of foreclosure.

“If someone loses thieir job and is looking to do a loan modification, we’re seeing a shift in what lenders will expect,” Sheppard says. “In 2008, most lenders wouldn’t accept a lease as a source of income. Now, lots of them are considering that valid.”

Written by Elizabeth Ecker