FHA Issues New Guidelines on Reverse Mortgages

November 5, 2013

The FHA has published updates to the rules that affect how FHA Reverse Mortgages or Home Equity Conversion Mortgages are processed.

FHA Mortgagee Letter 2013-28, effective for all HECM case numbers assigned on or after January 13, 2014, states that participating FHA lenders processing HECM loans “must perform a financial assessment of all prospective mortgagors on all HECM transaction types, i.e., traditional, refinance, and purchase.”

What does that mean for HECM loan applications after January 13, 2014? Those who apply for an FHA reverse mortgage or HECM on or after this date will find their lenders required to do the following with the HECM application data according to Mortgagee Letter 2013-28:

• performing the credit history analysis.
• performing the cash flow/residual income analysis
• documenting and verifying credit, income, assets and property charges
  
• evaluating extenuating circumstances and compensating factors
• evaluating the results of the financial assessment in determining eligibility for the HECM
• determining if funding sources for property charges from HECM proceeds will be required; and
• completing a HECM financial assessment worksheet.

The reasons for the credit check requirement, according to the FHA, “is to determine if the mortgagor has demonstrated responsible management of debt, finances and home ownership obligations.”

The lender is required to review the HECM borrower’s credit history and loan application to, “identify debts/obligations that must be included in the residual income analysis and to determine if the mortgagor has:

• delinquent Federal debt;
• any unpaid liens against the subject property resulting from a State or court-
• ordered judgments;
• a satisfactory payment history on revolving credit, installment accounts, and mortgages; and
• a satisfactory history of timely payment of property charges”

The updated HECM loan rules now include federal judgments or delinquent debts to the federal government to be "paid-in-full or a satisfactory repayment plan between the prospective mortgagor and the Federal agency owed must be in place prior to closing of the HECM."

Additionally, "Any delinquent Federal debts or liens against the real estate must not be in excess of the mortgagor’s net principal limit, unless the mortgagor has a separate source of funds from which to draw and pay those debts. Liens against the real estate resulting from delinquent Federal debt must be satisfied or resolved."

When it comes to state debts or local loans, the rules are different. "FHA does not require the HECM mortgagor to satisfy an unpaid State or local court-ordered judgment prior to or at closing, although the mortgagee may impose such a requirement. Liens against the real estate resulting from outstanding state or local court judgments must be satisfied and removed or subordinated to the HECM first and second liens at closing."

For more information on these new HECM loan rules, speak to a loan officer about how the changes may affect you.