Yes, HUD and other reverse mortgage programs do use an income qualification component when determining whether borrowers qualify for a reverse mortgage. You may ask why when there is no payment required but there really is a good reason.

HUD does not want borrowers to get the loan if the loan will not allow them to live in the home comfortably, even after they receive it.

HUD has had the benefit of analyzing hundreds of thousands of reverse mortgages now and they have seen that there really is still a risk of default for borrowers unable to pay their taxes and insurance (which is a default on the loan causing the lender to initiate foreclosure proceedings) when the borrowers still cannot afford the home and their basic expenses even after they receive their reverse mortgage.

Home Equity Conversion Mortgage Residual Income Requirements

Problems Qualifying? Consider Alternatives

As harsh as it sounds, it is better for the borrower if they are forced to accept the fact that they must make other arrangements that might include downsizing, relocating, seeking other ways to make income from their property (like renting a room), etc. before they get a reverse mortgage and begin to use their equity. There is nothing worse than having a borrower use their equity to remain in their home for several more years only to then realize that they are still unable to afford the home later, but now they have no equity and cannot afford to move either. But having said all that, if you can afford the home and its expenses after the loan, there are other ways a lender can help you meet the reverse mortgage residual income requirements.

But first, what is residual income?

HUD uses a very easy way to qualify for most borrowers when it comes to income known as the residual income method. Simply put, after you pay all your obligations for your home (any costs for the property like taxes, insurance, HOA dues if any and a 14 cents per square foot allocation for utilities), and any debts you have (car, credit cards, etc.), you must have a certain amount of money left to live each month as determined by your location and your family size. In your case, you have no debts, and it sounds like it is just you so after your housing costs for taxes and insurance and the utilities, you need to have anywhere from $529.00 to $589.00 per month left to live on. I am sure you would agree that this is not very much money to pay for gas, insurance, food, and anything you might need so HUD is already being very lenient on qualification.

Asset Dissipation for Residual Income

And then to make it easier for borrowers, if you have assets but not enough income, they allow reverse mortgage lenders to use the assets as a type of income even if you aren’t using them that way (knowing you can if you need to). If you have money in the bank, HUD allows a process known as asset dissipation which means the lender can use a formula established by HUD that assumes you use a set amount of your assets monthly and adds that amount to your income. They can even use some of the proceeds of the loan.

Opt for LISA – Life Insurance Set Aside

If you are close but don’t make the HUD minimum requirement, the lender might be able to still issue an approval with a Life Expectancy Set Aside or LESA wherein the lender sets money aside from the loan to pay your taxes and insurance as they become due. A LESA account is not a bad deal as you pay no interest on the funds while they are in the LESA account because those funds are not borrowed until the lender uses them to pay your taxes or insurance. Only then is the actual amount used for the installment paid added to your outstanding balance of your loan and that portion begins to accrue interest, but the remainder of the unused funds still do not accrue any interest because you have not used them yet.

Paying off Debt to Qualify

If you pay off the loan prior to them being used, you do not have to repay that portion of the loan and you never did accrue interest on it. The easiest way I have gotten people to understand this is to think of a credit card on which you had a $10,000 line of credit but you only spent $5,000 but decided to close the card. You must pay back the $5,000 plus any interest that accrued on that amount but not on the entire line of $10,000 because you didn’t use the rest of the line. The unused portion of the LESA account would be the same thing. If you do not use the funds, they are unborrowed and therefore do not need to be repaid.

So, the bottom line in your case is did your reverse mortgage lender attempt to qualify you with all these methods? Your credit score should not disqualify you for the loan. Whereas delinquent credit, especially in the last 24 months, could have an adverse effect on your application, no minimum credit score is required for a reverse mortgage. It never hurts to get a second opinion from another lender. If the lender did take all these approaches into consideration and there really is no way to meet the HUD requirements, then you need to make some hard decisions. Is it in your best interest to downsize which might necessitate a move and is that even possible?

Additional Alternatives

You might be able to use a reverse mortgage to purchase a different home if there is a less expensive home that might even work better for you in the long run considering location and functionality. Is your home large enough to consider a roommate and is that even an option for you? Do you have family members/heirs who might be willing to fund a familial reverse mortgage (where they are willing to pay you a monthly stipend with the ultimate repayment being the property)? These are all options and sometimes it is best to speak with your family or a good financial advisor to see what options might be available that you have not considered.