FHA Single Family Housing Policy Handbook 4000.1, Part II — i. Final HECM Decision (04/29/2024)

FHA Single Family Housing Policy Handbook 4000.1, Part II — i. Final HECM Decision (04/29/2024)

i. Final HECM Decision (04/29/2024) The underwriter is ultimately responsible for making a HECM decision on behalf of their Direct Endorsement Mortgagee in compliance with HUD requirements. In making the final HECM decision, the underwriter must evaluate the results of the financial assessment and determine whether, and under what conditions, the Borrower meets FHA eligibility criteria. To determine whether the HECM represents a sustainable solution for the Borrower’s financial circumstances, the underwriter must evaluate whether the Borrower meets Residual Income, credit history, and property charge history requirements, including the use of Extenuating Circumstances and Compensating Factors. The Mortgagee must not use FHA’s Technology Open To Approved Lenders (TOTAL) Mortgage Scorecard to perform the financial assessment for HECMs. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 682 Last Revised: 11/26/2025 i. Duty of Care/Due Diligence The underwriter must exercise the same level of care that would be used in approving a HECM entirely dependent on the Property as security. Compliance with FHA requirements is deemed to be the minimum standard of due diligence required in originating and underwriting an FHA-insured HECM. ii. Specific Underwriter Responsibilities The underwriter must review each HECM as a separate and unique transaction, recognizing that there may be multiple factors that demonstrate a Borrower’s ability and willingness to meet their financial obligations and comply with the terms of the HECM. The underwriter must evaluate the totality of the Borrower’s circumstances and the impact of layering risks on the probability that a Borrower will be able to meet their financial obligations and comply with the terms of the HECM. As the responsible party, the underwriter must: • review appraisal reports, compliance inspections, and credit analyses to ensure reasonable conclusions, sound reports, and compliance with HUD requirements regardless of who prepared the documentation; • determine the acceptability of the appraisal, the inspections, the Borrower’s ability to meet their financial obligations and comply with the terms of the HECM, and the overall acceptability of the HECM for FHA insurance; • identify any inconsistencies in information obtained by the Mortgagee in the course of reviewing the Borrower’s application regardless of the materiality of such information to the origination and processing of a HECM; and • resolve all inconsistencies identified before approving the Borrower’s application, and document the inconsistencies and their resolutions of the inconsistencies in the file. The underwriter must identify and report any misrepresentations, violations of HUD requirements, and fraud to the appropriate party within their organization. iii. Credit and Property Charge Payment History The underwriter must determine the creditworthiness of the Borrower, which includes analyzing the Borrower’s overall pattern of credit behavior and the credit report. See Credit History Review Requirements and Property Charge Payment History Review Requirements. The lack of traditional credit history or the Borrower’s decision to not use credit may not be used as the basis for denying the HECM application. Where the Borrower’s credit and/or property charge payment history does not meet the criteria described in Satisfactory Credit History and Satisfactory Property Charge Payment History, the Mortgagee must either document Extenuating Circumstances, or require a Fully Funded LESA. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 683 Last Revised: 11/26/2025 Compensating Factors cannot be used to compensate for any derogatory credit. The underwriter must ensure that there are no other unpaid obligations incurred in connection with the HECM transaction. iv. Monthly Expenses The underwriter must calculate the Borrower’s monthly expenses and verify that they have been supported with proper documentation. See Monthly Expense Analysis. v. Effective Income The underwriter must review the income of a Borrower and verify that it has been supported with the proper documentation. See Effective Income Analysis. vi. Residual Income The underwriter must calculate the Borrower’s Residual Income and verify that it is supported with proper documentation. See Residual Income Analysis. vii. Life Expectancy Property Charges (A) Definitions Projected Life Expectancy Property Charges refer to the amount of HECM proceeds necessary to pay property taxes, Hazard Insurance, and Flood Insurance, if applicable, based on the life expectancy of the youngest Borrower. Life Expectancy Set-Aside (LESA) refers to a Set-Aside account that is established for the payment of property taxes, Hazard Insurance, and, if applicable, Flood Insurance until expended or while the HECM is not in Due and Payable status. LESA funds cannot be held in an escrow account. Property Charge Set-Aside refers to a portion of a Borrower’s Principal Limit that is designated for payment of Property Charges. A Property Charge Set-Aside can result from a Borrower being required to establish a Life Expectancy Set-Aside (LESA) or when a Borrower elects to have the Mortgagee pay Property Charges on their behalf. Fully Funded Life Expectancy Set-Aside (LESA) refers to a portion of the Borrower’s Principal Limit that is designated for payment of property taxes, including special assessments levied by municipalities or state law, Hazard Insurance, and, if applicable, Flood Insurance for the estimated remainder of the Borrower’s life expectancy. With a Fully Funded LESA, the Mortgagee makes payments directly to the billing agency. A Borrower can voluntarily elect to have a Property Charge Set- Aside created at closing. If the Borrower chooses this option, the Property Charge Set-Aside will function as though it were a Fully Funded LESA. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 684 Last Revised: 11/26/2025 Partially Funded Life Expectancy Set-Aside (LESA) refers to a portion of the Borrower’s Principal Limit that is designated for partial payment of property taxes, Hazard Insurance, and, if applicable, Flood Insurance for the estimated remainder of the Borrower’s life expectancy. With a Partially Funded LESA, the Mortgagee makes payments to the Borrower who is responsible for the remaining amounts owed and delivering the full payment to the billing agency. (B) Standard The underwriter must calculate the Projected Life Expectancy Property Charges for all HECMs, regardless of whether a LESA is required or not. The underwriter must determine if the Borrower is required to use HECM proceeds to pay for Property Charges from a Fully Funded or Partially Funded LESA. Where the Mortgagee will pay Property Charges from a Fully Funded LESA, there will be an effective reduction in the Borrower’s monthly expenses. Where the amount of Property Charges to be paid through the Fully Funded LESA is such that the Borrower will still fall significantly short of the Residual Income standard, the approval of a HECM, even with a Fully Funded LESA, may not represent a sustainable solution for the Borrower’s financial circumstances. (1) Fully Funded LESA Where the Mortgagee determines the Borrower has not demonstrated the willingness to meet their financial obligations as stated in Satisfactory Credit History and Satisfactory Property Charge Payment History and no Extenuating Circumstances can be documented, the Mortgagee must, at a minimum, require a Fully Funded LESA. Through the Fully Funded LESA the Mortgagee will use HECM proceeds to pay property taxes and insurance premiums on behalf of the Borrower. The Borrower remains responsible for timely payment of all other Property Charges. (2) Partially Funded LESA Where the Mortgagee determines the Borrower has demonstrated the willingness to meet their financial obligations as stated in Satisfactory Credit History and Satisfactory Property Charge Payment History but does not meet the Residual Income Standard and no Compensating Factors can be documented, the Mortgagee must, at a minimum, require a Partially Funded LESA. The Mortgagee must determine whether the Partially Funded LESA will provide sufficient funds that will result in the Borrower meeting the Residual Income standard. If the establishment of the Partially Funded LESA will not result in the Borrower meeting the Residual Income standard, then the HECM is not a sustainable solution. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 685 Last Revised: 11/26/2025 A Partially Funded LESA is not required if the Borrower voluntarily requests a Fully Funded LESA. If the amount of the Partially Funded LESA is greater than 75 percent of the Projected Life Expectancy Property Charges, a Fully Funded LESA must be required. Through the Partially Funded LESA, the Borrower will receive semiannual payments from HECM proceeds to pay property taxes and insurance premiums. The Borrower remains responsible for timely payment of all Property Charges. (3) Voluntary Fully Funded LESA If a Partially or Fully Funded LESA is not required, the Borrower may voluntarily request a Fully Funded LESA to pay their property taxes and insurance premiums. If a Partially Funded LESA is required, the Borrower may voluntarily request a Fully Funded LESA. See Voluntary Property Charge Funding Options. (4) Calculation for Projected Life Expectancy Property Charges Mortgagees must calculate Projected Life Expectancy Property Charges for each HECM using: • 120 percent of the projected sum of: • current property taxes; • Hazard Insurance premiums; and • Flood Insurance premiums; • the HECM Expected Rate; • the annual MIP rate; and • the life expectancy of the youngest Borrower, with the Borrower age rounded up to the nearest whole year if the next birthday is less than 183 Days after the estimated date of closing. The formula used to calculate Projected Life Expectancy Property Charges is: {1.2 × (PC ÷12)} × {(1 + c)m+1 ‒ (1 + c)} ÷ {c × (1 + c)m } PC (Property Charges) divided by 12 is the current total monthly Property Charge for property taxes, Hazard Insurance, and Flood Insurance. The current total monthly Property Charge is multiplied by 1.2 to take into account expected increases in property taxes and Hazard and Flood Insurance over the life expectancy of the youngest Borrower. c is the monthly compounding rate which is defined as the Expected Rate plus the annual MIP rate divided by 12. The Expected Rate must be the same rate that is used to determine the Principal Limit. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 686 Last Revised: 11/26/2025 m is the Total Annual Loan Cost (TALC) life expectancy in total years of the youngest Borrower, with the Borrower age rounded up to the nearest whole year if the next birthday is less than 183 Days after the estimated date of closing, multiplied by 12 (e.g., for a 74-year-old Borrower whose birthday is more than 183 Days after the estimated date of closing, TALC life expectancy is 12 years multiplied by 12 months, which equals 144). (5) Calculation for Fully Funded LESA The formula to calculate the amount of the Fully Funded LESA is the same as the Projected Life Expectancy Property Charges. (6) Calculation for Partially Funded LESA The formula used to calculate the amount of a Partially Funded LESA is: (1.2 × MRIS) × {(1 + c)m+1 ‒ (1 + c)} ÷ {c × (1 + c)m} Monthly Residual Income Shortfall (MRIS) is the difference between the Borrower’s monthly Residual Income and the applicable amount of Residual Income for the Borrower’s geographic region and family size, based on the Table of Residual Incomes by Region. m is the TALC life expectancy in total years of the youngest Borrower, with the Borrower age rounded up to the nearest whole year if the next birthday is less than 183 Days after the estimated date of closing, multiplied by 12 (e.g., for a 75- year-old Borrower whose birthday is less than 183 Days from the estimated date of closing, TALC life expectancy equals 132, which is 11 years multiplied by 12 months). c is the monthly compounding rate which is defined as the Expected Rate plus the annual MIP rate divided by 12. The Expected Rate must be the same rate that is used to determine the Principal Limit. The MRIS is multiplied by 1.2 to take into account expected increases in property taxes and Hazard and Flood Insurance over the life expectancy of the youngest Borrower. (7) Life Expectancy Set-Aside Growth Rate All LESAs increase each month at a rate equal to one-twelfth of the sum of the Note rate plus the annual MIP rate from the date the loan is funded. The LESA amount is determined at origination and the remaining LESA balance is adjusted monthly by applying the following formula: 𝐿𝐸𝑆𝐴 𝐵𝑎𝑙𝑎𝑛𝑐𝑒𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑜𝑛𝑡ℎ= 𝐿𝐸𝑆𝐴 𝐵𝑎𝑙𝑎𝑛𝑐𝑒𝑝𝑟𝑖𝑜𝑟 𝑚𝑜𝑛𝑡ℎ(1 + 𝑑) −𝑇𝑀𝐿𝐷 II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 687 Last Revised: 11/26/2025 𝑑= (𝑁𝑜𝑡𝑒 𝑟𝑎𝑡𝑒+ 𝐴𝑛𝑛𝑢𝑎𝑙 𝑀𝐼𝑃) 12 LESA Balancecurrent month is the LESA balance in the current month. LESA Balanceprior month is the LESA balance in the prior month. d is the LESA growth rate, which is one-twelfth of the sum of the Note rate plus the annual MIP rate. TMLD is the LESA monthly distribution in the current month. (8) Fully Funded LESA Information to the Borrower The Mortgagee must inform the Borrower of the following: • funds will be used to pay the taxing authority or insurance carrier directly; • the Mortgagee is responsible for making timely payments to the taxing authority or insurance carrier when funds are sufficient; • the projected amount of funds required to cover the LESA charges over the estimated life expectancy of the youngest Borrower may be insufficient to cover LESA charges for the full length of that specified amount of time; • no funds will be available during any applicable Deferral Period for an Eligible NBS; and • the Borrower is responsible for the payment of all Property Charges, including the LESA charges, over the life of the HECM when funds are insufficient or the balance of the LESA is zero. For additional Property Charge Set-Aside requirements, see Property Charge Set- Aside in the HECM Servicing and Loss Mitigation section. (9) Partially Funded LESA Information to the Borrower The Mortgagee must inform the Borrower of the following: • the Borrower will receive semiannual payments from the Set-Aside, which must be used to pay the taxing authority and/or insurance carrier; • the Borrower is responsible for making timely payments to the taxing authority and/or insurance carrier over the life of the HECM; • the projected amount of funds required to cover defined Property Charges over the estimated life expectancy of the youngest Borrower and the income assumptions used to project semiannual distributions to the Borrower may be insufficient to cover LESA charges for the full length of that specified amount of time; • no funds will be available during any applicable Deferral Period for an Eligible NBS; and II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 688 Last Revised: 11/26/2025 • the Borrower will no longer receive semiannual payments and will continue to be responsible for the payment of all Property Charges, including the LESA charges, over the life of the HECM when funds are insufficient or the balance of the LESA is zero. For additional Property Charge Set-Aside requirements, see Property Charge Set- Aside in the HECM Servicing and Loss Mitigation section. (10) Voluntary Property Charge Funding Options For adjustable rate HECMs, if the Mortgagee does not require a LESA, the Borrower must inform the Mortgagee of the manner in which to pay Property Charges. The Borrower may: • elect to have a Fully Funded LESA; • elect to have the Mortgagee pay such charges by withholding funds from monthly payments due to the Borrower or by charging such funds to a line of credit; or • elect to be responsible for independent payment of all Property Charges. For fixed rate HECMs, if the Mortgagee does not require a LESA, the Borrower must inform the Mortgagee of the manner in which to pay Property Charges. The Borrower may: • elect to have a Fully Funded LESA; or • elect to be responsible for independent payment of all Property Charges. The Borrower may not cancel any voluntary election property charge payment option. If the HECM proceeds are insufficient to pay Property Charges, the Borrower must pay all Property Charges, even though the Borrower elected payment to be made by the Mortgagee. For additional Property Charge Set-Aside requirements, see Property Charge Set-Aside in the HECM Servicing and Loss Mitigation section. (C) Required Documentation Mortgagees must provide documented reasons for the amount a LESA has been funded and for approving the HECM when Borrowers do not meet the standards for Satisfactory Credit History, Satisfactory Property Charge Payment History, and Residual Income. viii. Assets The underwriter must review the assets of a Borrower and verify that they have been supported with the proper documentation. See Asset Requirements. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 689 Last Revised: 11/26/2025 ix. Verifying Initial Mortgage Insurance Premium and Maximum Claim Amount The underwriter must review the IMIP and MCA and verify that they have been supported with the proper documentation. x. Servicing Fees (A) Definitions Servicing Fee refers to the monthly amount charged by the Mortgagee when the cost of servicing is not included in the Note rate. Servicing Fee Set-Aside refers to an amount withheld from the HECM proceeds for the payment of the monthly servicing fee. (B) Standard The maximum servicing fee that may be charged on a fixed rate or an annually adjustable rate HECM is $30 per month. The maximum servicing fee that may be charged on a monthly adjustable rate HECM is $35 per month. If the Mortgagee chooses to assess a servicing fee, they must establish a Servicing Fee Set-Aside based on payment of the monthly servicing fee calculated for the life expectancy of the youngest Borrower or Eligible NBS, if applicable. Formula for Servicing Fee Sk = FEE × [(1+i)(m+1) – (1+i)] / [i × (1+i)m] Sk is the Servicing Fee Set-Aside required in the kth month of the HECM, where k at time of loan origination is equal to 1, for future payment of flat monthly loan servicing fees from the Borrower’s account, and this amount is constant for the entire month. i is the monthly compounding rate calculated as one-twelfth of the sum of the mortgage interest rate (Note rate) and the annual MIP rate. m is the number of remaining months that the servicing fee could be collected, i.e., the remaining term on a tenure mortgage in the kth month of the HECM: m = 12 × (100 – Borrower’s Age) – k + 1 Borrower’s Age is the Borrower’s age used to calculate the Principal Limit, and FEE is the monthly loan servicing fee charged to the Borrower’s account. Where loan servicing charges are included in the mortgage interest rate (Note rate) and are paid as a percentage of the outstanding loan balance, then FEE is zero, and the calculation of Sk results in a zero Set-Aside amount for all months. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 690 Last Revised: 11/26/2025 For all other cases, the Servicing Fee Set-Aside, Sk, will decrease as k increases, reaching zero for: k = 12 × (100 – Borrower’s Age) xi. Borrower Approval or Denial (A) Re-processing The Mortgagee must re-evaluate a HECM when any data element of the HECM changes and/or new Borrower information becomes available. This includes information that may impact the: • credit history review; • property charge payment history review; • monthly expense analysis; • Effective Income analysis; and • Residual Income analysis. (B) Documentation of Final HECM Decision The underwriter must complete the following documents to evidence their final HECM decision. The Mortgagee is responsible for providing well-documented reasons for approving the HECM when the Borrower does not meet the standards for Residual Income, Satisfactory Credit History, and Satisfactory Property Charge Payment History, and all other financial assessment policies. The Mortgagee must complete the following documentation requirements. (1) Financial Assessment Worksheet The underwriter must record the following items on the HECM Financial Assessment Worksheet: • their decision; • any Extenuating Circumstances and Compensating Factors; • any approval; and • their Direct Endorsement Identification Number and signature. (2) Form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value The underwriter must confirm that form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value, is completed as directed in the form instructions. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 691 Last Revised: 11/26/2025 (3) Form HUD-92051, Compliance Inspection Report, or Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report The underwriter must confirm that form HUD-92051, Compliance Inspection Report, or Part B of Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report, is completed when required repairs must be completed before closing. (4) Form HUD-92900-A, HUD Addendum to Uniform Residential Loan Application The underwriter must complete form HUD-92900-A, HUD Addendum to Uniform Residential Loan Application, as directed in the form instructions. An authorized officer of the Mortgagee, Borrower, Eligible NBS, and the underwriter must execute form HUD-92900-A, as indicated in the instructions. (C) Test Case Phase For cases involving Mortgagees that receive a Direct Endorsement Program Test Case Phase approval letter from FHA, the Mortgagee must complete and submit the processed HECM application and Documentation of Final HECM Decision post- closing to FHA for review and issuance of a Firm Commitment or Rejection Notice. See Test Case Phase. (D) Conditional Approval The underwriter must condition the approval of the Borrower on the completion of the final RLARM and form HUD 92900-A at or before closing if the underwriter relied on an initial RLARM and form HUD-92900-A in processing the HECM. (E) Notification of Borrower of Approval and Term of the Approval The Mortgagee must timely notify the Borrower of their approval. The underwriter’s approval or the Firm Commitment is valid for the greater of 90 Days or the remaining life of the: • Conditional Commitment Direct Endorsement Statement of Appraised Value issued by HUD; or • underwriter’s approval date of the Property, indicated as the Action Date on form HUD-92800.5B. (F) Borrower and Seller Inspection of the HUD-1 Settlement Statement The Mortgagee must prepare the HUD-1 Settlement Statement (HUD-1) at least one business day before closing. The Mortgagee must provide a copy of the HUD-1 to the Borrower and seller at least one business day prior to closing. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 6. Closing Handbook 4000.1 692 Last Revised: 11/26/2025 Mortgagees are responsible for the accuracy of the HUD-1. Errors reported by the seller or Borrower must be resolved prior to the date of closing. (G) Responsibilities upon Denial When a HECM is denied, the Mortgagee must comply with all requirements of the FCRA, and the Equal Credit Opportunity Act (ECOA), as implemented by Regulation B (12 CFR Part 1002). 6. Closing

Source: FHA Single Family Housing Policy Handbook 4000.1, Part II — i. Final HECM Decision (04/29/2024) · source URL · snapshot 8c03836f77f317e1