The recent change that now requires a financial assessment before being approved for a reverse mortgage is a reason why the product is being viewed in a better light than in previous years. For potential borrowers, however, there are some things they should be aware of before they dive right into these loans, according to a recent article by the Houston Chronicle.
The goal of enforcing the financial assessment for potential borrowers is to reduce defaults on reverse mortgages by making sure borrowers can pay property taxes or home insurance, the article says. By performing financial assessments, the default rate on reverse mortgages could decrease by up to 50%, according to a 2016 study from the Center for Retirement Research at Boston College cited in the article.
Borrowers should know what they’re getting into with the financial assessment and also should be aware that even if they don’t have an ideal outcome from the assessment, there is the set-aside option to help cover estimated tax and insurance payments over the expected life of the youngest borrower.
“Each financial assessment includes an analysis of the borrower’s credit history, with special attention given to any foreclosures, defaults, late mortgage payments and late payments for property charges,” the article says. “Research has shown prospective borrowers’ credit scores are ‘huge predictors’ of their likelihood to default on reverse mortgages.”
The article points out that the new regulations aren’t much different from the underwriting requirements in place for traditional mortgages, so the new regulations have been a long time coming. Though, the implementation of the financial assessment and set-asides does lengthen the time between when the borrower applies for the reverse mortgage and when he or she completes the loan.
“But conducting a financial analysis of prospective borrowers and requiring set-asides for those at higher risk of default are steps many have said were needed,” Stephanie Moulton, associate professor at the John Glenn College of Public Affairs at Ohio State University, said in the article.
Read the full Houston Chronicle article.
Written by Alana Stramowski