Underwriting: The Process of Verifying Occupancy

Written by Britany Luth

All reverse mortgage loan officers know that the borrower is required to live in the home as his or her primary residence. But those who also understand what steps are taken to confirm borrower occupancy are at an advantage.

When you and your customers know what’s expected, you can anticipate and address any potential red flags before loan files are delivered to underwriting. Using this knowledge can help you streamline the loan process and ensure a positive experience for your customers. It can also reduce the risk of borrower default and may even help you close more loans.

The Principal Residency Status Requirement
The Code of Federal Regulations (24 C.F.R. 206.39) requires that HECM borrowers live in the property that secures their loan as their principal residence—defined as “the dwelling where the mortgagor maintains his or her permanent place of abode and typically spends the majority of the calendar year. A person may have only one principal residence at any one time.” The lender is required to document that the property is the borrower’s primary residence, and must include all documentation in the binder for HUD endorsement.

The Review Process
Once a reverse mortgage application is received, the underwriter will review all normal file documents to determine if there’s a question of occupancy. Indicators of occupancy can include:

* How long the borrower has lived in the property as the primary residence

* When the borrower acquired title to the property and who else is vested on the title

* What mailing address is listed for the borrower throughout the file

* What phone records exist for the property and any other real estate owned

* What property tax records, including homestead and other county exemptions, are currently in place

* What is included on the listing or sales history of the property

* What address is on the borrower’s driver’s license or other forms of identification

* What current and former addresses are listed on the credit report

* What other mortgages are reported on the credit report

* What is indicated by the appraisal photos

If after reviewing these documents there’s a question of occupancy, the underwriter may request explanations from the borrower, as well as additional supporting documentation that will be sent to HUD. This may include:

* Utility bills for the property, such as electricity, gas, water, etc.

* Other billing statements, such as cellphone, credit cards, etc.

* Filed income tax returns

*

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Occupancy inspection

The underwriter will also perform his or her own research through various third-party systems that provide confidence levels and predictive indicators to assist in confirming owner occupancy. This research is used in conjunction with all other documentation to create a more complete picture of the potential situation and minimize the likelihood of closing on a non-owner-occupied property. It is important to note that documentation is key and even if the borrower has a great story to justify any anomalies, actual documentation must be present and verifiable in order to move the loan forward.

HECM for Purchase
The HECM for Purchase program requires that the borrower occupy the property within 60 days after closing. Since the buyers will not move into the property until after the loan is closed, none of the aforementioned documentation will be available. Therefore, the underwriter must use other research methods to confirm that the borrower will move into the property after closing. This may include determining the borrower’s reasons for moving, how many other properties the borrower owns and any businesses the borrower runs that may be far away from the new property. The underwriter must be reasonably assured that the home will become the borrower’s principal residence within 60 days of closing.

After a HECM for Purchase loan closes, the lender must certify to the FHA that the borrowers have moved into the property within this timeframe. Some lenders, including Urban Financial Group, perform occupancy inspections after closing to verify that the borrower is living in the home before the file is sent to HUD for insurance.

If the borrower has not moved into the property within 60 days of closing, the lender cannot submit the file to HUD for insurance. At that point, the lender must work with the borrower to get them to move into the property, or begin default proceedings when all attempts to rectify the situation have been exhausted.

Post-Closing Occupancy Considerations
During the life of the loan, the reverse mortgage servicer will monitor occupancy. Once per year, the servicer will send a letter to the borrower’s home, which the homeowner must sign and return to confirm they’re living at the property. If the signed letter isn’t returned, and the servicer cannot reach the borrower by mail or by follow-up phone calls, an occupancy inspector will be sent to the borrower’s residence. If it’s found that the borrowers are not living in the property, the servicer may put the loan into default status and begin foreclosure proceedings.

HUD Requirements for Failing to Comply
The underwriter is ultimately responsible for performing a due diligence review of the loan and documenting to HUD that the borrowers occupy or intend to occupy the subject property. Failure to do so will result in the loan being uninsurable, or HUD requiring future indemnification of the loan. Fortunately, there are some steps that you as

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the loan officer can take before applications are submitted to help prevent delays in the loan process and avoid uninsurable loans. See the sidebar to the right for tips.

Tips for Loan Officers
-Explain the occupancy requirement to the borrowers and ask them up-front if they live in the property full time (or, in the case of HECM for Purchase, if they plan to live in the new home as their primary residence). Make sure they understand that the loan must be repaid once all borrowers on title vacate the home.

-Ask if they have any other residences, and if so, how those residences are used.

-If their mail is sent to another address, find out what that address is used for.

-Provide a letter of explanation in the file to explain any circumstances that may raise questions about the borrower’s occupancy status.