When it comes to having our credit scores assessed, we often have one of two reactions. If our score is good, we tend to be indifferent, but if it’s less than ideal, a feeling of dread starts to creep in. Regardless of which group you fall into, the reality is that good people can have bad credit. As we’ve all seen first-hand this past year, unforeseen circumstances such as a job loss, serious illness, or accident can spell trouble for our financial situations – not to mention our credit scores.
Fortunately, if you’re considering a Home Equity Conversion Mortgage (HECM) – also known as a reverse mortgage – there is good news. While there are requirements to qualify for the loan, having a good credit score is not the only determining factor. Unlike traditional forward mortgages where eligibility is based solely on income and credit worthiness, reverse mortgage eligibility accounts for much more – including available equity in the home.
Since monthly payments are optional and not required on a reverse mortgage*, having a high credit score is not required. And while there is no minimum credit score required on the Home Equity Conversion Mortgage (HECM), a credit check will be ordered to calculate residual income and confirm whether you have any federal tax liens or delinquent debts that may affect loan eligibility.
Unlike property and occupancy requirements that are clearly written out to qualify for a reverse mortgage, credit history is reviewed on an individual basis. When necessary, lenders may ask you about any extenuating circumstances that may have impacted your credit history.
Consider some of these frequently asked questions about credit requirements for a reverse mortgage:
“How will my credit be examined when applying for a reverse mortgage loan?”
As part of the financial assessment process, reverse mortgage lenders are required to obtain a credit report from three credit reporting agencies. These agencies analyze a potential borrower’s credit history to determine if they’ve been able to keep up with debt management, finances, and homeownership obligations. However, even if your credit is not deemed “satisfactory,” it does not necessarily mean you’ll be rejected for the loan. Instead, the lender will conduct a deeper analysis of your accounts to identify late payments and overdue accounts as well as any extenuating circumstances that may have caused them.
“What is considered to be ‘satisfactory’ credit?”
A lender can consider a borrower to have satisfactory credit as long as they’ve made all housing and installment debt payments on time for the previous 12 months, have no more than two 30-day late payments in the previous 24 months, and have no derogatory credit on any revolving accounts within the previous 12 months. According to the Department of Housing and Urban Development (HUD), derogatory credit includes any revolving credit payments being more than 90 days late, and/or three or more revolving credit payments being more than 60 days late within the previous 12 months1. If a borrower has not demonstrated a willingness to meet their financial obligations and there are no extenuating circumstances that have been granted, the loan could be denied. Alternatively, the lender could require a fully funded Life Expectancy Set Aside (LESA) in order to move forward with the loan.
“What exactly is a LESA?”
A Life Expectancy Set Aside (LESA) is a reduction from the maximum loan amount available set aside to pay property expenses, such as taxes and insurance, for the estimated lifetime of the borrower. For example, if your maximum loan amount is $200,000 and your anticipated property expenses and other mandatory obligations over your estimated life expectancy is $70,000, the available loan balance would then be reduced to $130,000 to cover these costs.
If you’re looking to eliminate your monthly mortgage payment, reduce credit card balances or other debt, set aside funds to cover unexpected future expenses, or even just increase retirement cash flow, a reverse mortgage could be a powerful financial solution. What’s more, if you’re currently facing financial difficulties that could be alleviated by a reverse mortgage, then a subpar credit history may not stop approval.
As a matter of fact, according to HUD, if a reverse mortgage can help you pay for these financial obligations, your lender must take that into substantial consideration during the approval process.
*Real estate taxes, homeowners insurance, and property maintenance required.