MLO Mentor: The eligible non-borrowing spouse

MLO Mentor is an ongoing series covering compliance best practices for mortgage loan originators (MLOs). This article discusses HECM loans and the eligible non-borrowing spouse. Enroll in firsttuesday’s 8-Hour NMLS CE to renew your California MLO license and learn more about fraud and abuse prevention in your practice.

Borrower eligibility requirements 

HECM loans are only available to borrowers 62 years of age or older. [i] This minimum age rule applies to all borrowers and co-borrowers on the loan. [24 CFR §206.33] 

Marital status and eligible non-borrowing spouses

Eligible non-borrowing spouses now have protection against being effectively evicted from their home upon the death of the borrowing spouse.  An eligible non-borrowing spouse is the borrower’s spouse at the time of the HECM loan closing, but is not a borrower on the HECM loan. The eligible non-borrowing spouse does not have to meet any age requirements, but their age will be considered in determining the principal limit for the borrower.

For HECM loans with case numbers assigned on or after August 4, 2014, an eligible non-borrowing spouse may defer repayment of a reverse mortgage in the event of the borrower’s death.

To be considered an eligible non-borrowing spouse, the non-borrowing spouse needs to:

  • remain the spouse of the borrower for the borrower’s remaining lifetime after obtaining the HECM loan;
  • be identified and disclosed as the spouse at the time of origination, on the HECM loan documents; and
  • have occupied, and continue to occupy, the property securing the HECM loan as their principal residence.[ii]

If any of the above criteria are not met, the non-borrowing spouse is an ineligible non-borrowing spouse.

To determine marital status, an unmarried borrower must provide a certification at loan closing which states they are not married and the HECM loan will not be deferred for any future spouses.

A married borrower with an ineligible non-borrowing spouse must provide a certification at loan closing which states they are married and the HECM loan will not be deferred for their current ineligible spouse.

Further, the ineligible non-borrowing spouse must provide a certificate at loan closing which states they understand they are ineligible to defer HECM repayment upon the death of the HECM borrower.

A married borrower with an eligible non-borrowing spouse must provide a certification at loan closing which states the name of their eligible spouse, and the conditions for HECM deferral after the borrower’s death. The eligible non-borrowing spouse must provide a certificate at loan closing which states they are also aware of their status as an eligible non-borrowing spouse and the conditions for HECM deferment.

Married borrowers and their non-borrowing spouses must provide the certifications annually.

All rights to an eligible non-borrowing spouse’s right to a deferral cease in the event of a divorce.

Upon the borrower’s death 

Within 30 days of receiving notice of the borrower’s death, the lender is to obtain the above certification from the eligible non-borrowing spouse, and annually thereafter. Within 90 days of the death of the borrower, the eligible non-borrowing spouse must establish legal ownership or other legal right to remain on the property securing the HECM loan.

The deferral period lasts for as long as:

  • the surviving eligible non-borrowing spouse lives in the property as their primary residence; and
  • they continue to meet the borrower’s obligations under the HECM loan, including the payment of property taxes and insurance.

Note that while the eligible non-borrowing spouse is able to continue to live in the property and defer repayment of the HECM loan, they do not have access to the HECM loan funds. The HECM loan will continue to accrue interest, and the lender is still required to remit mortgage insurance payments to the FHA, and collect any servicing fees due.

The non-borrowing spouse still retains all rights as a successor to sell the property to satisfy the debt, according to rules set forth by HUD. [HUD Mortgagee Letter 2014-07]

Primary residence certification

The property must also be the primary residence of each borrower applying for the loan. If one or more of the borrowers is in a health care institution at the time of the loan, the property is still eligible if at least one of the other borrowers on the loan lives in the property as their principal residence. [12 USC §1715z-20(d)(3); 24 CFR §206.39]

The borrower is to make an annual certification that at least one borrower is still occupying the property as the primary residence in order to meet this requirement. Additionally, a second certification is required which verifies that the eligible non-borrowing spouse is still married to the borrower and the property is still the eligible non-borrowing spouse’s principal residence. If the borrower has died, the eligible non-borrowing spouse makes the annual principal residence certification. [24 CFR §206.211; HUD Mortgagee Letters 2014-07 and 2015-02]

If the surviving eligible non-borrowing spouse temporarily resides in a health care institution, the property is still considered their primary residence if:

  • they occupied the property immediately prior to entering the health care institution; and
  • their residency in the health care institution isn’t longer than 12 consecutive months. [HUD Mortgagee Letter 2014-07]

Federal debts

A borrower with delinquent or defaulted federal debts, such as a home loan guaranteed by the U.S. Department of Veterans Affairs (VA), or a federal student loan, is not eligible for an FHA-insured reverse mortgage if the debt cannot be satisfied at closing. [HUD Handbook 4235.1 Rev-1 Chapters 4-3 and 4-8.B]

A borrower who is suspended from any other federal lending program is not eligible for a HECM. However, a borrower may still be considered for the HECM program if:

  • the borrower’s former spouse, and not the borrower, was responsible for mortgage payments and defaulted on the payments after a divorce;
  • the borrower’s bankruptcy was caused by the death of the principal wage earner or an employment layoff; or
  • the borrower sold the property to a buyer who assumed, and later defaulted on the original mortgage. [HUD Handbook 4235.1 Rev-1 Chapter 4-3.C]

Financial Assessment 

Borrowers are required to meet additional minimum credit and financial standards before their HECM loan application may be approved or closed. [HUD Mortgagee Letter 2014-21]

The financial assessment requirement exists for all HECM borrowers and involves:

  • a credit history analysis;
  • a cash flow/residual income analysis;
  • documentation and verification of credit, income, assets and property charges;
  • evaluation of extenuating circumstances and compensating factors;
  • evaluation of the results of the financial assessment;
  • determining if a mandatory set-aside is required for property charges; and
  • completing a HECM Financial Assessment Worksheet. [HUD Mortgagee Letter 2014-21]

Credit report charges may only be collected at closing. If the HECM loan does not close, the borrower may not be charged separately for the credit report.

In 2019, HUD revised its requirements for verifying a borrower’s employment, income, and assets accounts to permit the use of third party verification services. [HUD Mortgagee Letters 2019-01]

Property charges collectively refer to:

  • property taxes;
  • hazard insurance;
  • flood insurance;
  • ground rents;
  • condominium fees;
  • planned unit development fees;
  • homeowners’ association (HOA) fees; and
  • any other special assessments levied by state or federal governments.

HECM mortgages are underwritten manually.

Payoff of non-HECM liens

HECM funds may only pay off non-HECM liens which:

  • have been in place for longer than 12 months prior to the date of the HECM closing;
  • home equity lines of credit (HELOCs) that don’t meet the seasoning requirements as long as the draw from HECM funds doesn’t exceed the draw limits during the first 12 months of the HECM; or
  • resulted in less than $500 cash to the borrower. [HUD Mortgagee Letter 2014-21; 24 CFR §206.36(c)]

A note on credit analysis

A tri-merged credit report is required for all borrowers, and for eligible non-borrowing spouses in community property states. A full credit analysis is now required to determine whether the borrower has a satisfactory credit history on all revolving and installment debts. A satisfactory credit history also includes:

A note on cash flow and residual income analysis

Qualifying ratios are not calculated for HECMs. The financial assessment gauges whether the borrower’s income and expenses allow them to meet their living expenses and obligation to pay the required taxes and insurances to avoid a HECM loan default.

Income sources considered include traditional income sources (employment income, interest income, etc.) and imputed income from liquid assets.

Expenses include federal and state income taxes, FICA taxes, property charges, utility and maintenance charges, payments on installment and revolving debts, mortgage related payments and other regularly occurring obligations such as alimony or rental losses on other real estate owned.

The financial assessment guidelines also determine whether a borrower is subject to mandatory set-asides for the payment of property taxes and insurance. Note that these set-asides are distinct from the repair set-asides required to pay for property improvements to meet HUD property standards.

Housing counseling

Before a HECM loan will be made to a borrower, the borrower must complete HECM housing counseling. The counseling informs borrowers about how reverse mortgages work and alternatives to HECMs. HECM housing counseling is available free or at very low cost from housing counseling agencies throughout the country.

The housing counselor may not be directly or indirectly associated with, or compensated by:

  • the party originating the mortgage;
  • the party servicing the mortgage;
  • the party funding the mortgage; or
  • the sale of annuities, investments, long-term care insurance or any other type of financial or insurance project. [12 USC §1715z-20(d)(2)(B)]

However, the lender is responsible for providing the borrower with a list of HUD-approved housing counselors to assist the borrower in fulfilling the counseling requirement. [12 USC §1715z-20(e)(1); 24 CFR §206.41(a)]

The counseling is to include discussion of:

  • options other than a HECM loan that are available to the borrower, including other housing, social service, health and financial options;
  • other home equity conversion options that are or may become available to the homeowner, such as sale-leaseback financing, deferred payment loans and property tax deferral;
  • the financial implications of entering into a HECM loan;
  • a disclosure that a HECM loan may have tax consequences, affect eligibility for assistance under federal and state programs, and have an impact on the estate and heirs of the homeowner;
  • whether the borrower has signed a contract or agreement with an estate planning service firm that requires, or purports to require, the borrower to pay a fee on or after closing that may exceed amounts permitted by the HUD Secretary;
  • if such a contract has been signed , the extent to which services under the contract may not be needed or may be available at nominal or no cost from other sources, including the lender; and
  • the rules and rights pertaining to eligible non-borrowing spouses, and the implications of marital status in states that recognize common law marriage. [12 USC §1715z-20(f); 24 CFR §206.41(b); HUD Mortgagee Letter 2014-07]

HUD encourages counseling to take place in person, but does not require it. (Some states, such as California, have passed more stringent laws mandating in-person counseling.)

The borrower is to provide the lender with a certificate from the counselor verifying the borrower has received adequate HECM housing counseling. [24 CFR §206.41(c)]

Property eligibility requirements

Property used as collateral for a HECM loan must be a one-to-four unit single family residence or condominium in a HUD-approved condominium project. [24 CFR §206.45(b); 24 CFR §206.51]

Title to the property must be held in:

  • fee simple;
  • on a renewable leasehold for not less than 99 years; or
  • under a lease having a remaining period of at least 50 years beyond the date of the 100th birthday of the younger borrower. [24 CFR §206.45(a)]

Standard flood insurance and lead-based paint requirements apply. [24 CFR §206.45(c)-(d)]

The property must be appraised according to existing HUD valuation policies. The appraisal is to make note of whether the property meets HUD’s general property standards. If the property does not meet HUD’s property standards, the appraisal is to explicitly note what repairs are required to bring the property up to HUD’s property standards. Properties which do not meet HUD’s property standards must be repaired to ensure the property will be adequate security for the HECM loan. [24 CFR §206.47(a); HUD Handbook 4235.1 Rev-1 Chapter 3-3.A.2] 

Required repairs 

The HECM loan may close before the repair work is completed if:

  • HUD estimates the cost of the remaining repair work will cost less than 15% of the maximum claim amount; and
  • the mortgage contains provisions approved by HUD concerning payment for the repairs. [24 CFR §206.47(b)]

The maximum claim amount is the lesser of the home’s appraised value or the FHA mortgage limits for the geographic area in which the property is located. In 2018, the maximum claim amount possible is $765,600. [24 CFR §206.3; HUD Mortgagee Letter 2019-20]

The lender is responsible for having a HUD-approved inspector review the progress and quality of the repairs, releasing the payment for the repairs and ensuring all mechanics’ liens, if any, are released. [24 CFR §206.47(c)]

When required repairs will be completed after closing, the lender may set aside a portion of the principal limit equal to 150% of the estimated cost of repairs, plus a repair administration fee. The repair administration fee is the lender’s compensation for administrative duties related to the repair work. This administrative fee cannot exceed the greater of 1.5% of the amount advanced for the repairs, or $50. The lender may collect the repair administration fee by adding it to the mortgage balance. [24 CFR §206.19(d)(2); 24 CFR §206.31(b)]

The lender may reimburse the borrower from the repair set-aside for the actual cost of materials as long as:

  • the lender receives receipts showing the materials were paid for by the borrower;
  • the lender ensures the repairs are inspected by a HUD-approved inspector;
  • the lender completes and signs the Compliance Inspection Report; and
  • the lender uploads the receipts and the Compliance Inspection Report using HUD’s Home Equity Reverse Mortgage Information Technology (HERMIT) system. [HUD Mortgagee Letter 2014-21]

Any remaining unused funds allocated to the repair will be transferred back to the principal limit. Conversely, if the funds set aside for the repairs are not enough to make the repairs, an additional amount will be set aside from the principal limit in a line of credit. [24 CFR §206.26(b)(1)-(2)]

For fixed-rate HECM loans with case numbers assigned on or after June 25, 2014, unused repair set-asides may not be disbursed to the borrower, under any circumstances. [Mortgagee Letter 2014-11]

If repairs are not completed when required by the mortgage, the lender may stop any monthly payments under the HECM loan, and the mortgage will convert to the line of credit payment option. Until the repairs are completed, the lender may not make any line of credit payment except as needed to pay for repairs required by the mortgage. [24 CFR §206.26(b)(3)]

Repair set-aside funds may be disbursed during a deferment under the eligible non-borrowing spouse rule to make repairs specified in the loan documents, during the specified timeframe.  [HUD Mortgagee Letter 2014-07]

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