Qualifying for a Mortgage
Since the crash of the Stock Market and the housing industry 8 years ago, it has become much more difficult to qualify for a mortgage than it was in the past.
With the advent of new regulatory changes and rules affecting both industries, the impact on a potential borrower has been significant.
By “significant”, I am referring to the enormous amount of documentation a potential borrower must submit to the Lender who they are applying with for a new mortgage. A lot of people are very upset about the amount of paperwork and scrutiny they have to undergo in order to become approved for a mortgage.
But, these regulations and piles of documentation are not necessary ( There is now the Financial Assessment) for a senior to provide if they are applying for a Reverse mortgage. Because there are no payments on a Reverse loan, the applicant DOES NOT have to qualify using their FICO scores or Debt to Income Ratios.
(The Financial Assessment does require some bank statements or any statements showing cash reserves & verification that the borrower has made their property tax & Homeowners insurance payments on time for the previous 24 months. And if not, they might be required to have an Impound account set up to make sure that they are paid in the future.)
As a matter of fact, even if they have poor credit or a BK and their income isn’t very much, they will qualify for the FHA HECM Reverse loan. It’s just a matter of providing a letter of explanation for any derogatory credit.
I recently had a client who due to a very serious illness and the medical expenses associated with it, used up all of their credit cards to pay their mortgage payment and other monthly expenses and to cover what their insurance didn’t pay and eventually they had to file for a bankruptcy, plus they also owed money to the IRS.
They repaid the IRS, completed the bankruptcy and I was still able to have them approved for their Reverse mortgage and paid off the existing loan leaving them free of a monthly mortgage payment.
This is just one of many examples of how credit and income are irrelevant for qualifying for a Reverse loan.
And the BORROWER STILL OWNS THEIR PROPERTY. The bank NEVER takes it when they pass away, the estate goes to the heirs.
Here is an interesting article that discusses a little known program offered by Freddie Mac for those how are challenged to qualify for a mortgage under the traditional underwriting guidelines.
Mortgage Lending Eases for Retirees Under Freddie Mac
Posted By Jason Oliva On May 28, 2013 @ 12:43 pm In News,Reverse Mortgage
A “little known change” in Freddie Mac’s rules could help limited income homeowners qualify easier for a new mortgage, including retirees.
Though the rule has been around since Spring 2011, it has been “slow to spread,” according to Freddie Mac executives .
The change lets lenders use a significant portion of a borrower’s eligible financial assets to determine whether they qualify for a Freddie Mac mortgage.
Under Freddie Mac’s guidelines, borrowers can utilize Individual Retirement Accounts (IRA) and 401(k)s, lump-sum retirement account distributions, even the proceeds from the sale of a borrower’s business, to determine their eligibility for a low-rate, conventional mortgage.
Additionally, assets in an IRA and 401(k) must be in a “fully-vested” retirement account recognized by the Internal Revenue Service, and must be entirely accessible to the borrower, not subject to a withdrawal penalty, and also not be currently used as a source of income.
To determine borrowers’ eligibility, a lender first adds up the eligible assets and multiplies the total by 70%. Then, the lender subtracts the funds needed to complete the transaction, such as down payments, closing costs, financing costs, escrows, etc.
The remaining amount is then divided by 360 months, regardless of loan term or account balance. The underwriter can then use what’s left to help the borrower meet the mortgage’s income eligibility requirements.
Freddie Mac has long allowed lenders to use income from dividends, interest payments, trust distributions, and Social Security payments in calculating a borrower’s qualifying income, according to Christina Boyle, vice president and interim head of Single-Family Sales & Relationship Management with Freddie Mac.
“All of which means Freddie Mac’s current requirements offer a potentially big deal for many prospective homebuyers, including the nation’s rapidly growing population of retirees and near-retirees who aspire to buy or refinance a home,” writes Boyle.