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Reverse mortgage guide
The financial assessment is HUD's review of whether you're willing and able to keep paying property taxes, homeowners insurance, and other property charges after a HECM closes. The lender looks at two things: your payment history, which shows willingness, and your residual income, which shows capacity. There's no minimum credit score for a HECM. If the review shows a problem, part of your loan may be set aside to pay those charges for you, called a Life Expectancy Set-Aside (LESA). Most of the people I work with pass without one, because we work hard with borrowers to explain credit problems and extenuating circumstances the right way. And a LESA isn't a denial.
Before 2015, a HECM didn't look very hard at whether you could keep up with your property taxes and insurance. If you were 62, owned enough equity, and finished counseling, you were mostly there.
That sounds great until you remember what happened next. A lot of borrowers fell behind on property taxes and insurance, and when that happens on a reverse mortgage, the loan can come due. HUD added the financial assessment to stop that from happening.
I think of it as protection for you, not a hurdle. Here's exactly what the lender looks at, how the decision gets made, and what you can do to get ready.
A reverse mortgage takes away the mortgage payment. It doesn't take away the cost of owning the home. You must continue to pay property taxes and homeowners insurance, maintain the home, and meet the other loan terms.
For years, the HECM program didn't check whether borrowers could do that. Some couldn't. They fell behind on taxes or let insurance lapse, and their loans came due. That was bad for those families, and it was expensive for FHA's insurance fund.
So HUD changed the rules. The financial assessment was announced in 2014 and took effect for HECMs with FHA case numbers assigned on or after April 27, 2015, after HUD pushed it back from an earlier March 2 date. HUD revised the guide in 2016.
The lender, usually through its underwriter, looks at your whole picture:
The lender reviews the overall pattern of how you've paid your bills, not one slow payment years ago. Mortgage and housing payments matter most, then installment loans like a car payment, then credit cards.
HUD's guide treats your credit as satisfactory when, generally:
If your history doesn't meet that standard, it isn't automatically a no. The lender has to look at why, and whether the late payments came from circumstances beyond your control.
A few other rules worth knowing:
This is the heart of it. The lender checks whether your property taxes and HOA dues are current, with no past-due amounts in the last 24 months, and whether you've kept homeowners insurance in place.
If your insurance lapsed in the last 12 months, you'll generally need to put a policy in place and prepay 12 months of coverage at or before closing.
If you moved within the last two years, the lender looks at both homes together to cover the full 24 months.
Income counts if it's legal, steady, and likely to continue for at least the first three years of the loan. Common sources:
Non-taxable income like Social Security counts, but it isn't increased ("grossed up") on paper the way some other loan programs do.
Here's a part of the review many people don't know about. If you have savings, investments, or retirement accounts you can turn into cash within a year without a tax penalty, the lender can count them as monthly income for the calculation.
The basic idea: take your liquid assets, reduce taxable accounts for estimated tax, subtract any money you need to close, and divide what's left by the youngest borrower's remaining life expectancy in months. Your savings don't have to be spent. They just count toward showing you can carry the home.
The lender adds up your monthly obligations:
Debts the reverse mortgage pays off at closing, like your current mortgage, come out of the picture.
Residual income is simple math: your monthly income minus your monthly expenses. What's left is what you live on: food, gas, medicine, and everything else.
HUD sets a minimum residual income based on two things:
If your residual income meets HUD's minimum for your family size and region, you've shown capacity. If it falls short, the lender looks at compensating factors next.
A compensating factor is something that makes up for residual income that comes in a little short. HUD's guide lists compensating factors, and lenders may apply their own rules on top of it. Common ones include:
HUD allows some compensating factors only when your residual income is already close to the minimum, at least 80 percent of it. I'll tell you which apply with the lenders I'd send your file to.
HUD's guide recognizes that bad things happen to responsible people. An extenuating circumstance is an event beyond your control that caused the late payments. Examples HUD and lenders recognize include:
To count, you generally need to show:
A short letter in your own words, plus papers that back it up (a death certificate, a hospital bill, a layoff notice), usually does the job. Tell me about it early. It's much easier to document going in than to explain after the underwriter asks.
If the review shows you might struggle to keep up with property charges, the lender may require a Life Expectancy Set-Aside, or LESA. Part of your loan is set aside, and the servicer uses it to pay your property taxes and insurance for you.
The amount is based on your current property taxes and insurance, an allowance for increases, the expected rate, and the life expectancy of the youngest borrower. Younger borrowers and higher tax bills mean a bigger set-aside.
The set-aside reduces the money available to you for other uses. That's the real cost. In some cases, a required LESA leaves too little room to pay off your existing mortgage, and the loan can't go forward unless that gap is covered another way. I'll show you the numbers before you apply, so there are no surprises.
The good news: interest and mortgage insurance generally build only on LESA money as it's actually paid out, not on the whole set-aside on day one.
A LESA pays property taxes, homeowners insurance, and flood insurance. It doesn't pay HOA dues, so you still pay those yourself.
A LESA is an estimate. If taxes and insurance rise faster than expected, the set-aside may not last your whole life. If it runs out, paying those bills goes back to you. The servicer will tell you ahead of time.
Yes. Even if the lender doesn't require one, you can generally ask for a LESA. Some people like knowing their taxes and insurance are handled. Others would rather keep the money available. Once a LESA is required as a condition of the loan, though, you can't cancel it.
A past bankruptcy or foreclosure isn't an automatic no, but it gets a close look. For a refinance of the home you live in, it's usually part of the willingness review. For a HECM for Purchase, HUD has specific waiting rules. See Chapter 7 waiting period, Chapter 13 waiting period, and Chapter 11 waiting period.
When we start, I'll give you a list. It usually includes:
Most documents can't be more than about four months old at closing, so we'll refresh anything that ages out. Please don't send documents through the website. Your loan officer will tell you the safe way to share them.
If you're thinking about a reverse mortgage in the next year, a little prep goes a long way:
Not for a HECM. The lender reviews your payment history and residual income instead. Proprietary programs set their own credit and income standards.
It's your monthly income minus your monthly expenses, including property charges, debts, utilities, and upkeep. HUD sets a minimum based on family size and region.
An event beyond your control that caused late payments, like a spouse's death, a job loss, or a medical emergency, that you can document and that's unlikely to repeat.
A Life Expectancy Set-Aside. Part of your reverse mortgage is held back to pay your property taxes and insurance. It lowers the money available to you for other uses.
Yes. A LESA is a condition of the loan, not a denial. Whether the numbers still work depends on how much is set aside and what else the loan has to pay off.
Often, in some form. A non-borrowing spouse also counts in your household size when the lender checks your residual income. See the Non-Borrowing Spouse guide.
Generally yes, a new HECM gets a new review. See Reverse Mortgage Refinance.
A required LESA generally can't be canceled once the loan closes. If your situation improves a lot, a future refinance would come with a new review.
If you're not sure how the review will go, ask. I'd much rather hear about a late tax payment now than have the underwriter find it later. Start your reverse mortgage review, get your estimate, or call us at 530-888-6000.
More reading: How a Reverse Mortgage Works, Reverse Mortgage Costs, and Reverse Mortgage Counseling.
ZYNG Mortgage, Inc., NMLS #76801. A reverse mortgage has no required monthly mortgage payments and uses your home's equity. Fees, mortgage insurance and other costs can be added to the loan balance, and the balance grows over time as interest is added, so your equity typically decreases. When the loan becomes due, the home may need to be sold, or the loan repaid from other funds. Interest is not tax-deductible until it is paid, in part or in full. You keep title to your home and must keep paying property taxes, homeowners insurance and upkeep, and meet the other loan terms; not doing so can make the loan due and could lead to foreclosure.
This material is not from HUD or FHA and was not approved by HUD or a government agency.
HECM count at the top of this page: HUD data through September 2026 (source, opens in a new tab).
