In this blog post we will discuss everything that goes into determining eligibility including income requirements, credit history requirements and what factors lenders consider before agreeing to such an arrangement.
Income requirements in 2023
Residual income is the income left over after all other financial obligations have been met. The Department of Housing and Urban Development (HUD) sets various residual income requirements based on the size of the household and the property's location due to regional cost of living disparities.
The minimum necessary residual income ranges from $529 per month (for a one-person household in the Midwest and South) to as high as $1,160 per month (for a household with four or more members in the Western region).
When applying for a reverse mortgage for the first time, meeting income requirements is mandatory as part of the financial assessment underwriting guidelines.
The financial assessment process for a reverse mortgage is comparable to obtaining a traditional or "forward" mortgage, enabling the lender to comprehend your financial situation and ensure that you'll remain financially stable after receiving the reverse mortgage.
Besides examining your creditworthiness, income is one of the most vital aspects of the financial assessment.
However, income may be more intricate than anticipated, as the lender will require disclosure of all forms of income, not just conventional sources like Social Security or full-time employment income.
Is a debt-to-income ratio (DTI) required for a reverse mortgage?
Unlike traditional mortgages, reverse mortgages do not require a specific debt-to-income ratio (DTI). Instead, the lender uses a residual income analysis to determine the borrower's eligibility.
This method is more accessible to seniors as it allows them to use a portion of their income to cover their expenses without being disqualified for the loan.
The residual income analysis calculates the amount of income left after paying all other obligations, including taxes, insurance, and other debts.
The Department of Housing and Urban Development (HUD) has set specific residual income requirements based on family size and location. For instance, the minimum residual income requirement for a family of one in the West is $589 per month.
It's important to note that while reverse mortgages do not require a DTI, lenders still consider the borrower's credit history and financial background. Having a solid credit score and demonstrating financial responsibility can improve the chances of qualifying for a reverse mortgage.
For example, suppose a senior living in California has a monthly income of $3,000 and $2,000 in monthly expenses, including housing, taxes, insurance, and other debts. In that case, their DTI would be 66.67%, which is too high to qualify for most traditional mortgages.
However, with a reverse mortgage, the residual income analysis would consider the $1,000 leftover income after expenses, which meets the minimum requirement of $589 for a family of one in the West.
This residual income calculation allows more seniors to qualify for a reverse mortgage, regardless of their debt-to-income ratio.
Can assets count as a source of income?
When it comes to assessing the stable monthly income of reverse mortgage borrowers, HUD applies the same exact income requirements as it does for traditional loans.
However, unlike traditional loans, reverse mortgage borrowers have the advantage of using a technique called Asset Dissipation.
Asset Dissipation is a calculation that involves dividing the total amount of verified liquid assets by the borrower's life expectancy from the actuarial tables to obtain an effective income on paper, which is then used to supplement the residual income analysis.
For example, suppose a borrower has $150,000 in liquid assets and a life expectancy of 180 months.
In that case, the Asset Dissipation calculation would yield an additional $833.33 per month in income, which can be added to their other traditional sources of income for the residual income analysis.
The remaining available funds from the reverse mortgage can also be factored into this calculation.
Using Asset Dissipation, borrowers with substantial assets but limited monthly income can potentially qualify for a reverse mortgage.
However, it's worth noting that the Asset Dissipation calculation is subject to HUD guidelines and may vary depending on the borrower's location and other factors.
Additionally, borrowers must have enough liquid assets to meet their living expenses and maintain their property.
Why do lenders care about income if there are no monthly payments?
Lenders require proof of adequate income from reverse mortgage borrowers because even though there are no monthly payments required, borrowers are still responsible for paying property charges such as taxes and insurance as they become due.
Failure to pay these charges could lead to a default under the terms of the loan.
Therefore, it is important for borrowers to provide documentation of their income and any assistance they receive to ensure they can comfortably meet their ongoing financial obligations.
Going through a financial assessment and qualifying for the reverse mortgage may be necessary to ensure that the borrower has sufficient income to continue living in the home and paying all property charges.
Types of income
Income is more complex than it may appear, here is all the sources of income you will need to consider.
The most typical type of income is employment income, which refers to earnings obtained by working for an employer.
To verify your employment income, your lender will request your IRS Form W-2, which should contain details of your yearly income. To substantiate your employment and income for two years, the lender must review documentation.
Additionally, you'll require pay stubs for at least the most recent 30 days and one additional form of employment verification, such as a statement from your employer. (Alternative forms of documentation may also be acceptable.)
Non-borrowing spouse or other household member income
If you obtain a reverse mortgage, your spouse or any other household member who does not own the home and is not mentioned in the loan may have their income considered.
Even though it is not regarded as income for the lender's assessment purposes, it is advisable to document and report it to provide a more accurate financial picture.
For this type of income, you will need to submit the Social Security number of the person whose income is being considered and the documentation required for your own employment income.
Part-time employment income
Part-time employment income entails employment that usually involves less than 40 hours per week. It is considered for the financial assessment if you have held the job for at least two years and are expected to continue in the job.
If your wages have fluctuated, your lender will calculate your average wages over time.
Overtime and bonus income
Overtime and bonus income refer to additional income outside of your regular salary, such as bonuses or overtime pay.
To count towards the financial assessment, the lender must verify that you have received this income for at least the past two years and that it is expected to continue.
Seasonal employment income
Seasonal employment income is earnings earned on a seasonal basis, as opposed to year-round employment.
To be considered in the financial assessment, this income must have been earned for at least two years and be expected to continue during the next season.
Other factors should be taken into account. The lender will consider various types of income and benefits, such as:
- Employer housing subsidies
- Employment income from a family-owned business
- Self-employment income
- Commission income
- Rental income
- Disability benefits
- Pension or retirement benefits
- Annuity income
- VA benefits
- Social Security
- Disability benefits
- Workman's compensation
- Public assistance
- Trust income
Credit Requirements in 2023
To qualify for a Reverse Mortgage, a borrower must have a generally good credit history, and should not have any late payments for property-related charges such as taxes, insurance, or mortgages within the past 24 months.
Meeting these requirements is necessary to be approved for the loan and to avoid the need to set aside funds for future payment of taxes and insurance on the loan.
As part of the financial assessment, your lender will assess your credit history by obtaining a credit report for all borrowers.
Failing to provide satisfactory credit history is not an automatic reason for rejection, as per the guidelines set by the Department of Housing and Urban Development (HUD).
Instead, lenders will carry out additional analysis of your accounts to ascertain reasons for issues such as late payments or overdue accounts (if any), and evaluate if there are any extenuating circumstances that might have contributed to these issues.
The borrower's creditworthiness is evaluated based on several factors, including payment history.
A lender may consider a borrower to have satisfactory credit if they have made all housing and installment payments on time for the past 12 months and have not had more than two 30-day late housing or installment payments within the last 24 months.
Furthermore, a borrower may have satisfactory credit if they have not had any significant derogatory credit on revolving accounts in the previous 12 months.
According to HUD, major derogatory credit refers to any revolving credit payments that are more than 90 days late within the last 12 months or three or more revolving credit payments that are more than 60 days late within the previous 12 months.
To determine your creditworthiness, lenders will assess your payment histories in a specific order, starting with your current or previous mortgage debt and related housing expenses, followed by installment debts, and then revolving accounts.
This evaluation process helps lenders to determine how reliable you are in making payments and managing your debt.
Lenders consider several other credit issues besides payment history that may appear on a borrower's credit report or other records. These issues, even if they are more than two years old, must be addressed.
They include collections and charge-off accounts, which do not have to be paid off or placed under a payment plan, but the lender must determine why they were placed in collection or charged off.
Additionally, the borrower must provide a letter of explanation for each account. Judgments must be resolved or paid off before or at closing, but if they are not paid off, the borrower must have entered into a valid agreement with the creditor to make regular payments and have made timely payments for the last three months.
Delinquent federal non-tax debt must be verified with a creditor agency, and if the debt is valid and delinquent, the borrower is ineligible for a reverse mortgage until the delinquency is resolved. However, this debt may be paid off at closing using the reverse mortgage proceeds.
Borrowers with delinquent federal tax debt are ineligible for a reverse mortgage, but they can become eligible by paying off the debt (before or at closing) or by entering into a valid agreement to make regular payments and making timely payments for at least three months.
Borrowers with delinquent FHA-insured mortgages are also ineligible for a reverse mortgage until the delinquency is resolved, except if the reverse mortgage proceeds will be used at closing to pay off the delinquent FHA-insured mortgage on the borrower's principal residence.
Other delinquent FHA-insured mortgages must be resolved before the application can continue to be processed and are not mandatory obligations and may not be brought current or paid off at HECM closing using the reverse mortgage proceeds.
Can you get a reverse mortgage if you have bad credit?
Is it possible to obtain a reverse mortgage with poor credit? Having bad credit may not necessarily disqualify you from obtaining a reverse mortgage, as the credit requirements for refinancing are more lenient than for purchases.
However, if your credit has not been satisfactory in the past 24 months, you may be required to set aside funds from the loan to cover taxes and insurance.
While it is possible to be declined due to poor credit, it is not a common occurrence.
Can you get a reverse mortgage if you have filed for Bankruptcy?
It is possible to obtain a reverse mortgage even if you have a history of filing for bankruptcy in the past. However, the timing of when you can do so depends on whether the loan is a purchase or a refinance transaction.
For a refinance transaction, the waiting period after a bankruptcy discharge is typically two years. This means that you must wait at least two years after your bankruptcy has been discharged before you can apply for a reverse mortgage refinance.
During this time, it's important to focus on rebuilding your credit score and improving your overall financial situation.
On the other hand, if you are using a reverse mortgage to purchase a new home, the waiting period after a bankruptcy discharge may vary depending on the lender's policies.
Some lenders may require a waiting period of at least two years, while others may require a waiting period of up to four years.
It's essential to research and compare different lenders to find the one that best suits your needs and financial situation.