Reverse Mortgage Life Expectancy Set-Asides

Share

As of April 27, 2015, the rules for obtaining a reverse mortgages require the applicant to pass a three-part qualification, including a credit history analysis, a residual income test, a review of extenuating circumstances or compensating factors.

To get a general idea of these three phases of qualification, read through our blog post on Reverse Mortgage Qualification.

If you fail the credit portion of the qualification testing, and are not declined, you will be subject to a lifetime set-aside for property taxes and insurance (hazard and flood, if required). The pass/fail isn’t based on credit scores, but rather is about what kind of derogatory credit you have and how old it is. Let’s take a look at a couple of examples of the set-aside. The calculation is too complex to explain in detail, but it takes into consideration life expectancy, inflation, and the time value of money.

Life Expectancy Set-aside Amounts

If you have annual taxes and insurance of listed amount, this would be the set-aside for the following ages for a 5.06% fixed rate loan.

$1,500 per year                         $2,500 per year                         $3,500 per year

65 years old – $19,439             65 years old – $32,399            65 years old – $45,358

75 years old – $15,201             75 years old – $25,335            75 years old – $35,469

85 years old – $9,019               85 years old – $15,032             85 years old – $21,044

Let’s take a look at what the set-aside would mean for a real life loan example.

Jane Doe is 65 years old, and she owns a $300,000 home with a $50,000 mortgage balance. Her gross loan amount is $162,600 with an expected rate of 5.06%. Her closing costs are $5,500 and she is going to be subject to a lifetime set-aside due to derogatory credit. Given that her taxes and insurance run about $2,500 per year, her set-aside is $32,399.

So, a $162,600 gross loan amount,

  • minus $5,500 in closing costs,
  • minus $50,000 mortgage payoff,
  • minus $32,399 tax/insurance set-aside,
  • equals $74,701 available proceeds (of which $39,560 can be drawn in the first 12 months).

Making The Decision To Accept A Set-Aside

Senior Couple with MoneyIf you are living in a high tax or high insurance region of the country – in relation to home value – a large set-aside could be a major deterrent to getting a reverse mortgage. The intended purpose for the loan will be the main determining factor in whether a reverse mortgage makes sense. If half of the loan proceeds are tied up in the set-aside, is the loan still a fit? The answer to that is likely a “no”.

On the flip side, many people take out a reverse mortgage to improve their cash flow. Who pays the expenses isn’t important when it comes to how much you are taking in vs. paying out. The reverse mortgage, with a set-aside or without, is still a fit for that customer. Taxes and insurance need to be paid on the property either way, so it is still a benefit. This is especially true for someone drawing the tenure payment option. Reverse mortgage tenure payments are equal monthly payments for one’s life in the home. Given the choice to receive a monthly check, a set-aside has little impact on that customer’s cash flow.

Those who will be most affected by the large set-asides are customers with a substantial existing mortgage. Let’s use the same example above, but change the amount Jane owes on her mortgage to $150,000. The only option you’d have in that case is to come to the closing table with the amount of cash shortfall.

For example, the $162,600 gross loan amount,

  • minus $5,500 in closing costs,
  • minus $150,000 mortgage payoff,
  • minus $32,399 tax/insurance set-aside,
  • equals ($25,299) cash needed to close.

If one lender tells you that you need to have a life expectancy set-aside, I wouldn’t automatically assume that another lender will give you the same answer. Contact us today to find out if we come to the same conclusion. There is some subjectivity to the decision.

The above scenarios are approximations and depend on the interest rate at the time of application, the age of the borrower, the value of the property, the financial assessment, and are generally subject to change.

Share

2 thoughts on “Reverse Mortgage Life Expectancy Set-Asides

  1. I’ve been planning for a reverse mortgage for more than a year but I did not have a C of O for improvements made 9 years ago. I have been in the process of obtaining a variance which I got on 8/26/15. In the mean time, I have not been able to make the mortgage payments due to a job loss. I am 75 years old.
    I was told by One Reverse mortgage that I would be required to have the LESA. All of my other debts are paid on time monthly but I can no longer afford a $1700 a month payment on Social Security.
    Are there exceptions to the LESA requirement?

    1. Hey Michelle. Thanks for the question, as it’s a good one that comes up often. The loss of income from unemployment, reduced work hours, or furloughs is what we call an extenuating circumstance. If you can prove all of the following, you can be approved without a life expectancy set-aside –

      1) You had satisfactory credit (according to the new reverse mortgage standards) prior to being unemployed.
      2) The income you earned while unemployed was not sufficient to make timely payments on all outstanding accounts.
      3) You did not incur new debt around the time of the unemployment that exacerbated the problem.
      4) You are employed again or have alternative sources of income.

      I believe that we are talking about current unemployment, so number four is more about explaining late payments that are older. I think we can find an underwriter that would agree that you don’t need to be employed to obtain the reverse mortgage, should you pass the residual income test. In that case, once we eliminate your mortgage payment, your current income would be sufficient to cover all expenses. Please contact me directly to discuss further.

Leave a Reply

Your email address will not be published. Required fields are marked *