Reverse Mortgage Eligibility: How We Assess Qualification

At Crestico, we believe in responsible lending and ensuring that a reverse mortgage is the right fit for your financial situation. HUD and the reverse mortgage industry have determined that these loans should not be used to delay downsizing if a homeowner cannot afford to maintain their property long-term. If a borrower lacks the income to cover ongoing expenses—especially once their reverse mortgage funds are depleted—they may risk default, which could eventually lead to foreclosure. To prevent this, HUD has implemented guidelines that lenders, including Crestico, follow to protect homeowners.

To ensure financial stability, Crestico follows a three-part qualification process similar to a conventional refinance or purchase loan. Since April 27, 2015, applicants have been evaluated based on credit history, residual income, and property charge payment history. Depending on the results, borrowers will receive one of four outcomes:

• Full approval with no set-aside for property charges
• Approval with a partial set-aside
• Approval with a life expectancy set-aside
• Loan denial if requirements are not met

At Crestico, we are committed to guiding you through the process and finding the best solution for your financial future. Let us help you navigate your reverse mortgage options with confidence!

At Crestico, we conduct a credit history review using a tri-bureau credit report. Unlike traditional loans, credit scores are not the primary focus—instead, we assess your financial history over the past two to three years, identifying any significant credit issues. Some key factors we review include:

• More than two 30-day late payments on mortgages or installment loans within the past 24 months
• One 90-day late payment or three 60-day late payments on revolving credit accounts (credit cards) within the past 12 months
• Collection or charge-off accounts
• Judgments or delinquent federal debt
• History of Chapter 7 or Chapter 13 bankruptcy

Each of these factors requires an explanation, and our underwriters will determine whether the credit issues stemmed from a disregard for financial obligations, difficulty managing debt, or extenuating circumstances. If no extenuating circumstances can be demonstrated, a Life Expectancy Set-Aside (LESA) may be required to cover property charges. If there aren’t enough funds to establish the set-aside—especially in cases involving a large mortgage payoff—the loan may be declined.

At Crestico, we are committed to helping you navigate the qualification process and finding the best solution for your financial future. Let us guide you through your reverse mortgage options with confidence!

When a prospective borrower does not meet the credit history requirements, Crestico may evaluate extenuating circumstances that contributed to financial difficulties. Examples of such circumstances include:

• Loss of a spouse due to death or divorce
• Job loss or layoff
• Emergency medical treatment or hospitalization
• Other one-time, unforeseen events beyond your control

To properly document extenuating circumstances, the following must be demonstrated:

• A clear connection between the specific event and its financial impact
• No additional actions by the borrower contributed to the credit issue (e.g., voluntarily leaving a job, reducing work hours, or taking on unnecessary financial obligations)
• A low likelihood that the financial hardship will occur again
• Proof of financial stability, such as other sources of income, assets, or available credit to help manage future financial challenges

At Crestico, we work closely with borrowers to assess their situation and determine if extenuating circumstances can be considered to help with loan qualification.

The residual income test, or cash flow test, is designed to assess whether you have enough income to cover your financial obligations. The goal is to ensure that you can pay your property charges and other liabilities listed on your credit report, while still having sufficient residual (net) income to meet your living expenses. The income sources considered for this test typically include:

• Social Security benefits
• Pension or retirement income
• Employment wages
• Rental income (must be reported on tax returns)
• Disability benefits
• Annuity payments
• VA (Veterans Affairs) benefits
• Interest, dividend, and trust income
• IRA or 401(k) distributions

At Crestico, we use this test to evaluate whether you have the financial capacity to maintain your property and handle any other financial commitments.

The property charge payment history covers the past two years from the time you apply for a reverse mortgage, and it applies to any property you've owned during that period, even if you no longer own it. We are required to verify the following:

• Property tax payments
• Homeowner's association dues, if applicable
• Homeowner's insurance (with a 12-month history)

Any payments made more than 30 days late are treated similarly to late mortgage payments. While one-time late payments can usually be explained, a pattern of consistently paying property taxes or association dues late, or allowing them to become more than 30 days overdue, can create a significant issue. This could result in the need for a life expectancy set-aside.

If you do not pass the credit history analysis or property charge payment history, and cannot provide evidence of extenuating circumstances, a life expectancy set-aside (LESA) will be required for property charges. This means that a portion of the reverse mortgage proceeds will be set aside, and the mortgage servicer will use these funds to pay property charges until they are exhausted. If the loan proceeds are insufficient to cover the set-aside, the loan will be declined. Think of the set-aside as a prepaid escrow account, funded by the loan proceeds.

Now that we've reviewed the three qualification tests, let's discuss what passing or failing them means. If you pass all the tests, you will be offered the loan with no set-aside, unless you choose to have one.

If you fail the credit or property charge payment history analysis, a life expectancy set-aside will be required based on your age and property charges. If there aren't enough loan proceeds to cover the set-aside and you don't have additional funds to bring to closing, your loan will be declined.

If you fail the residual income test, you will not be eligible for the loan. There are some exceptions if you meet 80% of the required residual income, but generally, you need enough income to cover your living expenses, even after the reverse mortgage funds are depleted.

After reading about reverse mortgage qualification, you might feel more confused than before. The good news is, you don't need to be an expert in these rules—that's where we come in. There are many nuances to these complicated regulations, and we have the experience from working with hundreds of scenarios to guide you.

It's crucial to find a loan officer who will conduct the qualification analysis before you apply and go through counseling (since counseling can be costly). Once we have your income and assets, along with a copy of your credit report, we can determine your eligibility and any set-aside requirements.