With a reverse mortgage you have no mortgage payment but you are still required to pay property tax, homeowners insurance and homeowners association (HOA) or co-op dues, if applicable. Depending on the value of your home and other factors, these costs can be significant.
Even though you are not required to make a monthly loan payment with a reverse mortgage, if you fail to pay your property tax or homeowners insurance you could default on the mortgage and the lender could foreclose on your property. In a worst case scenario you could lose your home.
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This is why when you apply for a reverse mortgage, the lender performs a borrower financial assessment to determine your ability to afford your monthly housing expenses after your mortgage closes. The lender's financial assessment looks at your income, assets and credit score to evaluate your financial situation and creditworthiness. In short, the lender needs to make sure that you make enough money or have sufficient financial reserves to cover your costs.
If the lender determines that you do not have enough income or assets to pay for your continuing housing expenses or if you have poor credit, the lender is required to set aside a portion of the reverse mortgage proceeds to cover these costs over the expected life of the loan -- thus the term life expectancy set aside.
In short, instead of receiving all of the proceeds from your loan, a chunk of your reverse mortgage goes into a separate account to help you cover your housing expenses going forward. This means you receive less money from the reverse mortgage, which may make it a less attractive financing option, especially given the high closing costs involved.
The amount of the life expectancy set aside is based on your age and projected property expenses. The older the borrower and lower the property expenses, the lower the reverse mortgage life expectancy set aside. The younger you are and the higher your housing costs, the greater the life expectancy set aside.
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The life expectancy set aside for a reverse mortgage can be thousands of dollars and consume 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.
In this case, the borrower would receive $20,000 less in proceeds from the reverse mortgage. When you add the life expectancy set aside to paying off any existing loans on your property plus closing costs, you may not receive as much proceeds from a reverse mortgage as you expected.
Although you still eliminate your monthly mortgage payment, if you were counting on using the proceeds from a reverse mortgage to pay for a major purchase or even ongoing living expenses, the life expectancy set aside can make that more challenging. In this scenario, a reverse mortgage may not make much financial sense.
This is why if you are considering a reverse mortgage, one of the most important questions to understand is if the life expectancy set aside applies to you and how much of your loan proceeds you are required to set aside. Knowing this information helps you better understand the financial benefits of a reverse mortgage so you can determine if it is the right program for you.
“What should I think about before applying for a reverse mortgage loan and what should I ask a reverse mortgage counselor?” CFPB. Consumer Financial Protection Bureau, August 30 2019. Web.View All Lenders