What credit score is needed for a reverse mortgage?

Reverse mortgages are available to senior homeowners who own their homes outright or have built considerable equity in their homes. However, there are certain requirements that prospects must meet to qualify for a reverse mortgage, and you should check if you meet these requirements before you apply for a reverse mortgage.

There is no minimum credit score to qualify for a reverse mortgage, but your credit history may affect your eligibility. If your credit is not deemed “satisfactory”, the lender will conduct a financial assessment to determine if you have sufficient incomes or assets to keep up with the homeownership obligations. If your credit is not satisfactory, the lender may require you to set up a fully funded Life Expectancy Set Aside (LESA) to proceed with the reverse mortgage application.

Will the lender check your credit history?

As part of the financial assessment, reverse mortgage lenders must review the creditworthiness of potential borrowers. They must obtain a copy of your credit report from the three credit reporting agencies, which they use to review your credit history to determine if you are able to keep up with the homeowner obligations and other financial obligations related to the reverse mortgage.

Generally, your credit must be deemed satisfactory to proceed with the reverse mortgage application process. However, if your credit history is deemed “unsatisfactory”, it does not mean that your reverse mortgage application will be rejected. Rather, the lender is required to conduct further analysis of your credit accounts to determine the reason for late payments or overdue payments.

Although reverse mortgages are not as strict as traditional mortgages when it comes to credit scores, borrowers must prove their ability to continue maintaining the property and paying homeownership costs, including property taxes, homeowner insurance, and homeowner association fees.

What is considered to be satisfactory credit?

When determining whether your credit is satisfactory, the lender will check if you have made timely housing and installment payments in the past 12 months, and that there have been no more than two 30-day late payments for these accounts in the past 24 months. Additionally, you should not have derogatory credit on revolving credit accounts in the past 12 months.

When evaluating your creditworthiness, the lender will consider your payment history in current or previous mortgage debts and other housing-related debts, installment debts, and revolving debts. If you don't demonstrate a willingness to meet your financial obligations and there are no valid explanations, your reverse mortgage application could be denied.

What is a financial assessment?

In the early 2000s, there were increasing cases of defaults on property taxes and homeowners insurance among reverse mortgage borrowers, and this resulted in losses for reverse mortgage lenders. As a result, the Federal Housing Administration (FHA) introduced new guidelines in 2014 to reduce the risk of defaults and improve borrower quality.

The new rules required lenders to conduct financial assessments on potential borrowers’ credit history and income to weed out borrowers with poor credit and insufficient incomes. While you do not need stellar credit to qualify for a reverse mortgage, you need to have satisfactory credit to be eligible for a reverse mortgage.

However, if you do not meet the satisfactory credit guidelines, or you have a recent foreclosure, bankruptcy, or late payments, you may still get an FHA-insured reverse mortgage. In this case, the lender will require you to set up a LESA so that you won't have to worry about homeownership costs.

What is LESA?

A Life Expectancy Set Aside (LESA) is a fully funded financial account that can help you pay ongoing expenses associated with the reverse mortgage over your estimated life expectancy. These costs may comprise property taxes, homeowner insurance, homeowner association fees, and flood insurance, where necessary. However, you must have built enough equity to set up the LESA. If you have a large mortgage balance or high homeownership costs, there may not be enough money in the loan proceeds to fund LESA.

For example, if you qualify for up to a $200,000 reverse mortgage loan, and your anticipated ongoing costs over your life expectancy are $100,000, it means that the available reverse mortgage balance will be reduced to $100,000. Therefore, you will need to pay money out-of-pocket into the reverse mortgage to get a substantial amount of the available loan amount.

Does a reverse mortgage ruin your credit?

A reverse mortgage will not affect your credit. Typically, you won’t be required to repay the loan until a later time when you move out, sell the home, or die. Since you won’t be required to make monthly mortgage payments, the reverse mortgage lender does not report to credit agencies.

If you have bad credit, a reverse mortgage can help you pay off high-interest debts or late payments that have damaged your credit. You can also use the loan proceeds to pay off your traditional mortgage balance to avoid foreclosure on your home.

When is a reverse mortgage a good idea?

If you are considering a reverse mortgage, there are certain situations when a reverse mortgage loan might be a good idea.

Here are situations when you can take a reverse mortgage:

Supplement retirement income

After years of collecting payments from your employer, you may find your retirement checks insufficient to meet your living expenses. A reverse mortgage can provide you extra income either as a lump sum payment, monthly payment, or a line of credit to supplement your retirement income from Social Security, IRAs, pension, or investments.

You are struggling with mortgage payments

If your retirement income is not big enough, you may struggle to pay the monthly mortgage payments and still meet your monthly expenses. You can borrow a reverse mortgage against the home’s equity to pay off the mortgage balance and use the remaining funds to supplement your retirement income.