Reverse Mortgages: What is “Willing and Able”?

In April 2015, a new tool was put into place to determine whether a potential borrower would be eligible to acquire a Reverse Mortgage. The Department of Housing and Urban Development began to enforce a criteria that is called “willing and able” that determines that the potential borrowers are prepared to abide by the loan’s criteria and meet their responsibilities under the terms of the loan.

There are many advantages to a Reverse Mortgages. Probably the most attractive part of the loan involves the fact that, by mortgaging a property to a lending institution, the borrower is then able to count on a monthly check, or a line of credit, that provides them with extra income. After factoring in the loan costs and the percentage of the home’s equity that can be mortgaged, borrowers can count on an average of several hundred dollars in additional income, every month, to be used at their discretion.

That’s great news at a time when seniors are facing reduced pensions, higher health care costs and social security payments that aren’t keeping up with the cost of living.  However, for many years, the Reverse Mortgage’s borrower-obligations were not properly explained to potential borrowers. At first, HUD instituted a requirement that all HECM applicants undergo counseling sessions with HUD-approved, non-lender affiliated counselors to learn more about the loan before signing on the dotted line.

The numbers of Reverse Mortgage foreclosures, due to owner misunderstandings, inability or unwillingness to meet their loan obligations, continued to climb. By 2012 HUD reported to congress that they were experiencing a 16 billion dollar shortfall in their insurance fund, largely due to HECM foreclosures.

By April HUD had successfully introduced the “Willing and Able” rule which asserts that HECM applicants must submit documents that will demonstrate that they are willing and able to maintain the home that has been mortgaged through the HECM loan and pay for regular upkeep including property tax payments, homeowner’s insurance, flood insurance (where necessary) and the monthly insurance premium.

The “willingness” part of the assessment is conducted by a review of the potential borrower’s past performance and credit history. The “ability” refers to the individual’s income and assets versus his/her expenses.

A HECM borrower who is “willing and able” would be, ideally, someone who has a good credit history, can demonstrate that s/he pays his/her taxes and insurance payments on time and doesn’t have any outstanding liens or debits.

In cases where the potential borrower cannot prove that s/he is “willing and able,” the lender may set up a “set aside” fund in which a portion of the income from the home will be put side, in the lender’s care, to automatically make the needed payments. This solution does put an extra financial burden on the borrower who will have to pay an additional fee for the service.

Financial advisors and consultants believe that the “ready and willing” rule will return the Reverse Mortgage to its original objective – to function as a retirement income tool, rather than as a life jacket for cash-poor but house-rich retirees. They caution, however, that Reverse Mortgages are not the right tool for everyone. For some, a 30-year traditional loan could offer a more advantageous solution. Every potential borrower should review their own personal financial situation to find out how to proceed with such a decision.