Key Takeaways
- Lack of sufficient home equity is the number one reason for denial.
- Failing the Financial Assessment without the ability to fund a LESA will cause rejection.
- Properties in severe disrepair or non-FHA approved condos are ineligible.
\n\nReverse mortgage commercials make the process seem incredibly easy: Just make a phone call and get your cash!
In reality, underwriting a Home Equity Conversion Mortgage (HECM) is a rigorous process. Thousands of seniors are denied every year. If you are considering applying, you must be aware of the five most common roadblocks that lead to a rejected application.
1. Not Enough Equity (The Math Fails)
This is the most common reason for denial. You cannot borrow 100% of your home's value. Depending on your age and current interest rates, you can generally only access 40% to 60% of the equity. If your home is worth $300,000, and you already owe $200,000 on a traditional mortgage, the reverse mortgage proceeds will not be enough to pay off the existing loan. Unless you have the cash in the bank to bring the difference to the closing table, the loan will be denied.
2. Failing the Property Inspection
The FHA appraiser is acting as a health and safety inspector. If they discover a cracked foundation, an active termite infestation, or a roof that is actively leaking into the living room, the property fails. While some minor repairs can be completed after closing, major structural deficiencies must be fixed out of pocket before the loan is approved. If you don't have the cash to fix the roof, you can't get the loan.
3. The Un-Approved Condo
As discussed in a previous article, if you live in a condominium, the entire complex must be on the FHA-Approved Condo List. If your HOA has too many renters, inadequate insurance, or pending lawsuits, the FHA will reject the complex, instantly killing your application.
4. The Federal Tax Lien
While bad credit won't automatically disqualify you, owing money to the federal government will. If you have an unpaid IRS tax lien, or if you have defaulted on federal student loans, you are placed on a federal watch list called CAIVRS. You cannot get an FHA-insured loan of any kind until that federal debt is resolved.
5. Failing the Financial Assessment (Without LESA Funds)
If the underwriter determines you do not have enough residual income to pay your property taxes, they will require a Life Expectancy Set-Aside (LESA). However, a LESA requires taking a massive chunk of your available equity to fund the escrow account. If you barely have enough equity to pay off your existing mortgage, there won't be enough money left over to fund the LESA. The math falls apart, and the underwriter must deny the loan.\n