It’s no secret that when it comes to applying for a mortgage loan – whether forward or reverse – there are several requirements you will first need to meet. And in the case of a traditional ‘forward’ mortgage, perhaps the most intimidating of these requirements is having a sufficient credit score. After all, the higher your credit score, the more favorable your loan terms tend to be.
But what does your credit score mean when applying for a reverse mortgage? As the name suggests, reverse mortgages have some differences when compared against their traditional forward mortgage counterparts – one of the biggest differences being the importance of your credit score in securing the loan.
A three-digit number, usually on a scale of 300 to 850, credit scores are calculated based on your credit accounts to estimate how likely you are to repay borrowed money and bills. This data is compiled by credit bureaus such as Equifax, Experian, and TransUnion. And while credit score standards vary by bureau or credit-reporting agency, there are some general guidelines that determine your creditworthiness:
- Scores of 720 or greater are considered “excellent” credit
- Scores between 690 and 719 are considered “good” credit
- Scores between 640 and 689 are considered “fair” credit”
- Scores of 629 or lower are considered “poor” credit
So, what does it mean if your credit score is, well – less than stellar? According to an Experian study, nearly one-third of Americans have subprime credit1. From missed or late payments to high credit card balances, there are several reasons you may find yourself facing a subprime credit score. And while subprime borrowers often receive unfavorable terms on financial products, it is not always the case.
For those looking to tap into home equity with a reverse mortgage, there is some good news. While there are several requirements to qualify for the loan, having a good credit score is not the sole determining factor. Unlike traditional forward mortgages where loan eligibility is based primarily on income and creditworthiness, reverse mortgage eligibility accounts for much more – namely the available equity in the home.
One of the top benefits of a reverse mortgage is that monthly payments are optional2 – so having a high credit score is not required. While there is no minimum credit score to be eligible for the loan, you will be subject to a credit check as part of the Financial Assessment. The purpose is to calculate residual income and verify whether or not you have any federal tax liens or delinquent debts that could potentially affect loan eligibility.
The Financial Assessment
Although qualifying standards for a reverse mortgage are not nearly as strict as those of a traditional forward mortgage, borrowers are still required to meet loan requirements. On a reverse mortgage, these requirements include keeping up with property taxes, homeowners’ insurance, and general home maintenance. During the financial analysis, your lender will ask permission to conduct a credit check to determine that you have a solid history of paying bills on time, as well as adequate financial resources to meet these loan requirements.
Fortunately, unsatisfactory credit is not necessarily reason enough to reject a prospective reverse mortgage borrower, according to the Department of Housing and Urban Development (HUD). In these circumstances, lenders will conduct a further analysis of accounts to determine what may have led to late payments or overdue accounts, and whether there may have been extenuating circumstances.
Even if the financial assessment finds that you have less than ideal credit or inadequate income to meet loan requirements, you may still qualify for a reverse mortgage. In some cases, you may be required to opt for loan insurance via a Life Expectancy Set-Aside (LESA).
What is a LESA?
A pool of funds set aside from your total available reverse mortgage loan amount, a LESA helps to pay for property and insurance charges throughout the estimated life of the loan. Designed as an aid for borrowers with limited income or bruised credit, a LESA is similar to an escrow on a traditional mortgage where the lender sets up an account to make property tax and homeowners insurance payments on your behalf. The amount of funds to be set aside in a LESA is calculated by multiplying your expected life span in years by your project property taxes and homeowners’ insurance. For example, if your life expectancy is 25 years from the time you take out your reverse mortgage and your annual housing expenses are projected to amount to $5,000, your LESA would be $125,000.
While this amount does come out of your available loan balance3 and reduces your maximum loan amount, the upside is that a LESA can help eliminate the risk and worry of defaulting on your loan for non-payment of taxes and insurance. And this peace of mind can go a far way in making your golden years as relaxing and carefree as possible.
“Will a reverse mortgage affect my credit score?”
Great question! A reverse mortgage does not have any direct impact on your credit score. However, should you elect to use reverse mortgage funds to pay off existing debts, you may find a positive improvement in your credit profile – and increased credit scores!
Don’t let subprime credit get you down! Even if your credit has some blemishes, you may still qualify for a reverse mortgage. And at Longbridge Financial, we can help you navigate all your questions about the program to see if the loan is right for you.
Our Loan Officers are professionals in the business and are committed to recommending the reverse mortgage program only after they are certain it meets your unique needs. You’ll receive trusted personal, professional support as we get to know you, your home, and your finances.
See why more than 1.2 million Americans have already made a reverse mortgage part of their retirement plan4. For more information, or to see how much you may qualify for in proceeds, contact the Longbridge team today.
1 https://www.experian.com/blogs/ask-experian/research/subprime-study/
2 Real estate taxes, homeowners insurance, and property maintenance required
3 The loan balance increases over time as interest on the loan and fees accumulate
4 https://www.nrmlaonline.org/annual-hecm-endorsement-chart
