When you apply for a reverse mortgage, the lender performs a borrower financial assessment to determine your ability to afford ongoing monthly housing expenses such as property tax and homeowners insurance after the mortgage closes. Even though a reverse mortgage does not require the borrower to make a monthly mortgage payment, the borrower is still required to pay for these ongoing monthly expenses and failure to do so can result in default and foreclosure. The lender's financial assessment looks at a borrower's income, assets and credit score to evaulate if the borrower can afford the ongoing cost of owning the home.
If the lender determines that the borrower does not have enough income or assets to pay for the ongoing housing expenses or if the borrower has poor credit, the lender is required to set aside a portion of the reverse mortgage to cover for these costs over the expected life of the loan. The amount of the life expectancy set aside is based on the borrower's age and anticipated ongoing property expenses. The older the borrower and lower the property expenses, the lower the reverse mortgage life expectancy set aside, and vice versa.
The life expectancy set aside for a reverse mortgage can be thousands of dollars and eat-up a large amount of your loan proceeds. For example, for a 75 year old borrower with $2,000 in yearly ongoing housing expenses from property tax and homeowners insurance, the life expectancy set aside is approximately $20,000 which means the borrower receives $20,000 less in proceeds from the reverse mortgage. Prospective borrowers should understand if the life expectancy set aside applies to them and how much it is before determining if a reverse mortgage is right for them.
We encourage you to review our comprehensive reverse mortgage overview and download our free reverse mortgage guide that contains money-saving advice and expert insights.