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. 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.
- There is no minimum credit score required to qualify for reverse mortgages.
- A reverse mortgage will not appear on your credit report as a traditional loan would.
- HECM and Propriety reverse mortgages are both reverse mortgages, and they do not require good credit scores to qualify.
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?
Can you get a reverse mortgage with bad credit? 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?
A borrower may qualify for a reverse mortgage, even if their credit report reveals an active or recently discharged bankruptcy, so long as the following criteria are met.
If the bankruptcy has been dismissed or discharged prior to closing, the borrower will be eligible to obtain a reverse mortgage on their current home. If at least one year has passed since the credit report date of the dismissal or discharge, the borrower will not be required to provide additional documentation.
If the borrower wishes to obtain a reverse mortgage before a year has passed or if the credit report does not indicate the dismissal or discharge date, additional documentation will be required. The additional documentation consists of a court order signed by a judge and the discharge schedule.
If an FHA-insured loan was included in the opens in a new windowchapter 7 bankruptcy and the borrower wishes to obtain a HECM or other FHA loan, the waiting period is extended to three years.
Once all liens against the property and other federal debts have been paid off, a borrower with a opens in a new windowchapter 13 bankruptcy may obtain a reverse mortgage. A judge must also sign an approval note confirming that the borrower is not required to pay off the bankruptcy in order to proceed, meaning that the borrower is still responsible for making their monthly bankruptcy payments. The note must specify a rate, keeping in mind that if the specified rate is lower than the current closing rate, the loan will not close.
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. The Life Expectancy Set-Aside, also known as LESA, is a fund that is withheld from the total available proceeds of your reverse mortgage. This fund is used to pay for property and premiums charges over the course of the estimated life of the loan. It carries significant weight in the overall application procedure for reverse mortgages. They are taken into consideration by lenders during the application process when the lender is attempting to gain the applicant’s acknowledgment of the reverse mortgage application.
How much income do you need to get a reverse mortgage?
Because you are not required to make monthly repayments on a reverse mortgage, there are no minimum income requirements associated with it in the same way that there are for traditional mortgages and home equity loans.
What if I have an existing mortgage?
Even if you have an outstanding balance on your primary mortgage, you might still be eligible for a second mortgage known as a reverse mortgage. However, because the reverse mortgage needs to be in the first lien position, any existing debts must be settled before the loan can be issued.
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
You can turn a portion of the equity in your home into cash with the help of a proprietary reverse mortgage, which is a type of private loan.
Proprietary reverse mortgages are considered private loans and are therefore provided and insured by private lenders. The government does not provide financial support for these types of loans. This indicates that they are not covered by federal insurance and are not subject to the restrictions that are imposed by the opens in a new windowFederal Housing Administration (FHA). Due to the fact that lenders are able to lend amounts that are greater than the federal limit, these loans are also known as jumbo reverse mortgages.
For a HECM (Home Equity Conversion Mortgage), also known as an opens in a new windowFHA (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.
Overall, HECM and Propriety reverse mortgages are both reverse mortgages, and they do not require good credit scores to qualify.
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 bills. Therefore, it’s still important to keep up with your regular monthly payments and make sure that you don’t get behind on any monthly obligations. 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.
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.
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.