Changes in Home Equity Conversion Mortgages
FHA HECM loan rules have changed a great deal between 2014 and 2015, and now the FHA and HUD have clarified certain rules that dictate how FHA Home Equity Conversion Mortgage Loans are handled with regard to “life expectancy set-asides” and calculation of property taxes as part of a borrower’s debt-to-income ratio.
These changes, as reported in FHA Mortgagee Letter 2015-09, create what the FHA calls “a monthly growth rate for Life Expectancy Set-Asides” as well as clearing up a discrepancy “between the HECM Financial Assessment and Property Charge Guide and the model HECM Financial Assessment Worksheet transmitted with Mortgagee Letter 2014-22.”
What is a “life expectancy set-aside”? Potential HECM loan borrowers should know this term and how it affects their HECM loan.
According to the FHA, “The Life Expectancy Set-Aside (LESA) is used for the payment of property taxes, and hazard and flood insurance premiums, and will increase each month at a rate equal to one-twelfth of the sum of the mortgage interest rate (Note Rate), plus the annual mortgage insurance premium rate (currently 0.0125 or 1.25%), from the date the loan is funded.”
Furthermore, the FHA mortgagee letter states that LESA is calculated “at origination and its balance is adjusted monthly by applying the formula below. The LESA amount itself is not recalculated.”
Here is that formula--this information is likely most helpful to lenders, but as a borrower it never hurts to know how these calculations are made:
Formula PMLB * (1+d) – TMLD
- d–(Note Rate + 0.0125) /12
- PMLB–Prior Month LESA Balance
- TMLD–This Month LESA Distribution
“In Section 3.98, of the HECM Financial Assessment and Property Charge Guide attached to Mortgagee Letter 2014-22, the Federal Housing Administration (FHA) required mortgagees to compute property charges as a percentage of gross income.On the model HECM Financial Assessment Worksheet, Appendix 1 of the HECM Financial Assessment and Property Charge Guide, FHA provided a space for mortgagees to enter property taxes as a percentage of gross income.”
“In order to resolve this inconsistency, Section 3.98 is revised as follows: FHA has identified situations where property taxes exceed 10% of the mortgagor’s gross income as carrying greater levels of risk of default. Mortgagees must calculate property taxes as a percentage of gross income and enter this figure on the Financial Assessment Worksheet.”
Speak to a loan officer if you need additional information about these HECM loan changes.
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