It’s no secret that when it comes to applying for a mortgage, there are several requirements you will need to meet. And in the case oIt’s no secret that when it comes to applying for a mortgage, there are several requirements you will need to meet. And in the case of a traditional 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 with their traditional forward mortgage counterparts — one of the biggest differences being the importance of your credit score in securing the loan.
Decoding Your Credit Score
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 guidelines1 that determine your creditworthiness:
- Scores of 800 or greater are considered “exceptional” credit
- Scores between 740 and 799 are considered “very good” credit
- Scores between 670 and 739 are considered “good” credit
- Scores between 580 and 669 are considered “fair” credit
- Scores of 579 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, about 30% of Americans have subprime credit.1 (The term “subprime” generally refers to a credit score of 600 or below.2)
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 get a reverse mortgage, there’s 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 mortgages where loan eligibility is based primarily on income and creditworthiness, reverse mortgage eligibility accounts for much more — like the available equity in your home.
One of the top benefits of a reverse mortgage is that monthly mortgage payments are optional — so having a high credit score is not required, though you must still meet other loan terms, like keeping up with property taxes, homeowners insurance, and property maintenance.
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 — a built-in consumer protection. The purpose is to calculate residual income and verify whether you have any federal tax liens or delinquent debts that could potentially affect loan eligibility.
The Reverse Mortgage Financial Assessment
Although qualifying standards for a reverse mortgage are not nearly as strict as those of a traditional forward mortgage, borrowers are required to complete a thorough financial analysis to ensure the loan is a sustainable, long-term solution and that you’ll be able to afford to continue paying property taxes, insurance, and home maintenance before moving forward. Your lender will ask your 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 your ongoing loan requirements.
Fortunately, unsatisfactory credit is not necessarily a reason to reject a prospective reverse mortgage borrower. 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 even still qualify for a reverse mortgage. But in some cases, you may be required to establish aLife Expectancy Set-Aside (LESA) during the loan process.
LESA is Here to Help
A LESA is simply a pool of funds set aside from your total available reverse mortgage loan amount. It helps pay for property taxes 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.
While this amount does come out of your available loan balance and reduces your maximum loan amount, the upside is that a LESA can help lower the risk of defaulting on your loan for non-payment of taxes and insurance. And this peace of mind can go a long way in making life as relaxing and carefree as possible.
Don’t Let Bad Credit Hold You Back
At the end of the day, even if your credit has some blemishes, you may still qualify for a reverse mortgage. And at Longbridge Financial, we can help answer all your questions about the program so you can decide if the loan is the right fit for you.
See why more than 1.3 million Americans have already made a reverse mortgage part of their financial strategy.3 For more information, or to see how much you could qualify for, use our free reverse mortgage calculator or contact our team today.
Reverse Mortgage Credit FAQs
- “What credit score do you need for a reverse mortgage?”
There is no minimum credit score required to qualify for a reverse mortgage. Unlike a traditional mortgage, reverse mortgage eligibility is based primarily on your available home equity rather than your credit score. You will still be subject to a credit check as part of the Financial Assessment, which verifies your bill-payment history and financial resources for property taxes, insurance, and maintenance. - “Can I qualify for a reverse mortgage with bad credit and limited income?”
Yes. Even if the Financial Assessment finds less-than-ideal credit or limited income, you may still qualify for a reverse mortgage. In some cases, you may be required to set aside funds in a Life Expectancy Set-Aside (LESA) to cover property taxes and insurance throughout the loan. - “Will a reverse mortgage affect my credit score?”
A reverse mortgage can cause a temporary, minor drop in your credit score when you apply due to a hard credit check, but the ongoing loan does not hurt your credit. However, using your reverse mortgage funds to pay off existing debts could potentially improve your credit profile.