Does Bad Credit Affect Reverse Mortgages?

You have no job, mounting medical bills, and poor credit. You’re 62, and your home is even older and in need of repairs. You might think you would be the least likely candidate to qualify for a mortgage loan, but you could be wrong.

By meeting these essential requirements, you may be able to finally obtain the financial boost you need to pay off high credit card debt, large medical bills, and other expenses — exactly the kinds of liabilities holding down your credit score. While a reverse mortgage can’t rewind the clock, it can help you live a more comfortable and stress-free retirement. In fact, a reverse mortgage typically rewards older borrowers in the form of a larger payout, the older you are! Your age is an asset.

Credit History Still Counts

Although a reverse mortgage’s qualifying standards are not nearly as strict or set in stone as a traditional mortgage (minimum credit scores, debt-to-income ratios, etc.), reverse mortgage borrowers do not get a complete pass when it comes to their credit history. Borrowers must still show they have the ability to maintain their home and continue paying property taxes and homeowners insurance premiums on their home.

The Financial Assessment

As such, the prospective lender will ask your permission to conduct a credit check as part of its financial assessment to determine that you have a history of paying bills on time and adequate financial resources to meet the financial obligations of the loan. As part of the assessment, the lender will examine such sources of income as your Social Security, pensions, and investments.

In cases where your application is on the bubble (the lender is undecided whether you’re a good or bad loan risk), approval of your application may require setting aside a certain amount of money to pay your ongoing property expenses (i.e. property taxes, homeowners insurance, and flood insurance if necessary), over your estimated life expectancy. It is possible for borrowers to outlive their “life expectancy.” If this occurs, borrowers would have to resume making property tax and homeowners insurance payments on their own.

The upside for borrowers is that a LESA helps eliminate the risk and worry of defaulting on your loan for non-payment of property taxes and homeowners insurance. On the downside, the LESA will reduce your maximum loan amount. For example, if your available loan balance would otherwise be $250,000, and a LESA is applied with a mandatory expense over your anticipated life expectancy of $50,000, then your available loan balance would become $200,000.

Bottom line, there are more important things than having excellent or even good credit. Bad things sometimes happen to good people, such as a job loss, serious illness, or an accident. Any of these events can send your credit score into a temporary tailspin, but the unique features of a reverse mortgage could still help you weather the storm.

FAQs

Does a reverse mortgage ruin your credit?

No. In fact, reverse mortgage lenders don’t typically report to credit agencies. After all, it’s hard to be late on your monthly mortgage payments when such payments are not required. And some uses of a reverse mortgage could help maintain or improve your credit score, such as paying down high-interest credit card debt that may otherwise be problematic for you, or keeping a reverse mortgage line of credit available for emergencies, which demonstrates to credit agencies that your finances have a financial cushion against the unexpected.  As with any mortgage you’ll need to continue meeting your ongoing property tax, homeowners insurance, and home maintenance obligations.

Do you need good credit to get a reverse mortgage?

No. It’s not a determining factor. Other factors like your age, home equity, and the prevailing interest rate are more important. At the same time, reverse mortgage borrowers will undergo a financial assessment to determine that they can honor the loan’s financial obligations, such as maintaining the home and paying property taxes and homeowners insurance.

If I owe the government money, can I qualify for a reverse mortgage?

No. This is one obligation that must be addressed before qualifying for a reverse mortgage. You must either pay the federal judgment(s) in full or arrange a satisfactory repayment plan between yourself and the federal government before your reverse mortgage can close. Typically, you must show a minimum payment history of three months to satisfy your lender.

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