While financial evaluation is essential in qualifying for a reverse mortgage, credit scores are not a key factor. When it comes to reverse mortgages, lenders generally look at the age of the applicant(s), the assets in their home, and their history of home-related payments. So if you’re among the Americans that are in difficult financial situations, a reverse mortgage could be the solution. In this article, I will answer some of the most common questions about credit score impact on reverse mortgages.
You can still qualify for a reverse mortgage even if you have a poor credit score. Lenders typically look at three things when considering a reverse mortgage: your age, your home equity, and your history of making home-related payments. Credit scores are not a key factor. If you have poor credit but meet these other qualifications, you could still qualify for a reverse mortgage.
What Is a Reverse Mortgage?
A reverse mortgage is a special type of loan that allows homeowners 62 and older to borrow against the equity in their home. The loan does not have to be repaid until the borrower moves, sells, or dies. Borrower(s) can use the money from a reverse mortgage for any purpose, including:
What Does a Reverse Mortgage Lender Look for in Terms of Eligibility?
To be eligible for a reverse mortgage, you must:
- Be 62 years of age or older
- Own your home outright, or have an existing mortgage loan balance that can be paid off with the proceeds from the reverse mortgage loan
- Live in the home as your primary residence
- Not be delinquent on any federal debt
- Participate in a consumer information session given by a HECM counselor
- Have records of paying your homeowner’s insurance premiums and property taxes on time
What Is the Minimum Credit Score Needed to Qualify for a Reverse Mortgage?
There is no minimum credit score required to qualify for reverse mortgages. However, keep in mind that the lender will still have to evaluate your credit history when considering you for a loan. They want to see a history of responsible credit use and debt management. So even if you don’t have an excellent credit score, you could still qualify for a reverse mortgage if you have a good history of making your bill payments on time.
Is it possible to acquire a reverse mortgage if you’ve filed for bankruptcy?
If you have filed for bankruptcy, you may still be eligible for a reverse mortgage. The lender will want to see that you have re-established your credit and that you are making your bill payments on time. They will also want to see that you have enough equity in your home to qualify for the loan. Therefore bankruptcy is not necessarily a barrier to getting a reverse mortgage loan. Each person’s situation is unique, so it’s best to speak with a reverse mortgage specialist to see if you qualify.
What About Tax Liens or Foreclosures impact on Reverse Mortgage?
If you have tax liens or have been through foreclosure, you may still be eligible for a reverse mortgage. The lender will want to see that the tax liens have been paid and that the foreclosure is resolved. They will also want to see that you have re-established your credit and that you are making your bill payments on time.
Is there a chance that a reverse mortgage will appear on your credit report?
A reverse mortgage will not appear on your credit report as a traditional loan would. Since regular payments are not required, most lenders will not report to credit agencies. Under this circumstance, you can rest assured that a reverse mortgage will not have an impact on your credit score.
Can a reverse mortgage affect your credit score?
Actually, it can! Since you can use the proceeds from a reverse mortgage to pay off your high-interest credit card debts, you will be reducing your overall debt, which will have a positive impact on your credit score over time.
What about LESA (Life Expectancy Set-Aside)?
If the lender still hasn’t approved your reverse mortgage loan application, the use of LESA can help. LESA is an optional life expectancy set aside that can be used to pay property taxes and insurance. With LESA the chance of you defaulting on your loan and going into foreclosure is greatly reduced. This makes the lender more likely to approve your loan application. However, the drawback is that the total loan proceeds (maximum loan amount) will be reduced by the amount set aside for LESA.
How much income do you need to get a reverse mortgage??
There is no minimum income requirement to qualify for a reverse mortgage. The lender will look at your overall financial picture to determine if you can afford the loan. This includes evaluating your monthly income, existing loan balance debts, and assets.
What if I have an existing mortgage?
You can still qualify for a reverse mortgage even if you have an existing mortgage. However, the amount you can borrow will be determined by the equity you have in your home after the existing mortgage is paid off.
How does this differ from Home Equity Loan?
With a home equity loan, you borrow a lump sum of cash and make fixed monthly payments over a set period of time. With a reverse mortgage, you don’t have to make any monthly payments as long as you live in your home. The loan is repaid when the last borrower leaves the home or dies. The existing mortgage balance, plus any interest and fees, will be due at that time.
Credit score on HECM vs. Proprietary Reverse Mortage
Proprietary reverse mortgages such as Jumbo Reverse or our Reverse mortgage for 55+ programs still follow the same general guidelines, but each program has its own specific requirements.
For a HECM (Home Equity Conversion Mortgage), also known as an FHA (Federal Housing Administration) insured reverse mortgage, there is no credit score requirement. Lenders will still pull your credit report and look at your overall history of debt management when considering you for a loan. In general, a higher credit score will give you access to more loan programs and better interest rates.
For our proprietary products, we have a minimum credit score requirement of 660. However, we take a holistic approach when considering your application. We will also look at your overall financial picture to see if you qualify for the loan.
Credit History Still Counts
Even though credit history is not a key factor in getting reverse mortgages, lenders still want to see that you have a good history of making your bill and monthly mortgage payments on time. Therefore, it’s still important to keep up with your regular monthly bills and make sure that you don’t get behind on any monthly payments. Although there are no direct rules when it comes to credit scores and reverse mortgages, a good credit score will always give you a better chance of getting approved for any type of loan.
The bottom line is that poor credit is not necessarily a barrier to getting a reverse mortgage. Unfortunate things can happen to good people, so don’t let a past bankruptcy, foreclosure, or tax lien stand in the way of exploring your options. Keep in mind that a reverse mortgage could actually improve your credit score over time if used correctly. And finally, remember that LESA is an option if you still haven’t been approved for a loan.
Each person’s situation is unique, even with bad credit you can still qualify. If you can show records of paying homeowners insurance, property tax, and other home expenses on time, you should be fine. Having said that, it’s best to speak with a reverse mortgage specialist for additional details. I had over 19 years of helping seniors understand their options and make informed decisions about their future with reverse mortgages. For more information about reverse mortgages, email or call me at (805) 735-5577.