March 31, 2015
The FHA and HUD have clarified rules that govern how FHA Home Equity Conversion Mortgage Loans are handled with regard to “life expectancy set-asides” and calculation of property taxes as part of a borrower’s debt-to-income ratio.
FHA Mortgagee Letter 2015-09, “establishes a monthly growth rate for Life Expectancy Set-Asides and clarifies a discrepancy between the HECM Financial Assessment and Property Charge Guide and the model HECM Financial Assessment Worksheet transmitted with Mortgagee Letter 2014-22.”
What is a “life expectancy set-aside” and how does the new clarification affect it?
According to the FHA, “The Life Expectancy Set-Aside (LESA) is used for the payment of property taxes, and hazard and flood insurance premiums, and will increase each month at a rate equal to one-twelfth of the sum of the mortgage interest rate (Note Rate), plus the annual mortgage insurance premium rate (currently 0.0125 or 1.25%), from the date the loan is funded. The LESA amount is determined at origination and its balance is adjusted monthly by applying the formula below. The LESA amount itself is not recalculated.”
Here is that formula for those who need it:
Formula PMLB * (1+d) – TMLD
Abbreviations:
- d–(Note Rate + 0.0125) /12
- PMLB–Prior Month LESA Balance
- TMLD–This Month LESA Distribution
When it comes to the property tax issue, the FHA mortgagee letter states:
“In Section 3.98, of the HECM Financial Assessment and Property Charge Guide attached to Mortgagee Letter 2014-22, the Federal Housing Administration (FHA) required mortgagees to compute property charges as a percentage of gross income.On the model HECM Financial Assessment Worksheet, Appendix 1 of the HECM Financial Assessment and Property Charge Guide, FHA provided a space for mortgagees to enter property taxes as a percentage of gross income.”
“In order to resolve this inconsistency, Section 3.98 is revised as follows: FHA has identified situations where property taxes exceed 10% of the mortgagor’s gross income as carrying greater levels of risk of default. Mortgagees must calculate property taxes as a percentage of gross income and enter this figure on the Financial Assessment Worksheet.”
Those who need additional clarification should contact the FHA directly at their toll-free number: 1-800 CALL FHA.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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