A few readers have asked “Can I Get a Reverse Mortgage with Bad Credit?” It’s a well-known fact that when applying for a mortgage loan, forward or reverse, there are certain standards that must be met initially.
Probably the scariest of these requirements is having a suitable credit score in the case of a standard ‘forward’ mortgage.
After all, the higher your credit score, the more beneficial the terms of your loan.
However, when applying for a reverse mortgage, what does your credit score mean?
As the name implies, reverse mortgages differ from regular forward mortgages in several ways.
One of the most significant being the priority placed on your credit score when receiving the loan.
Credit scores are a three-digit figure, typically between 300 and 850, that are computed using information from your credit accounts to determine your likelihood of repaying borrowed money and obligations.
Credit bureaus such as Equifax, Experian, and TransUnion compile this data.
Additionally, while credit score requirements differ by bureau or credit reporting organization, the following guidelines help establish 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 imply if you have a less-than-stellar credit score? Nearly one-third of Americans have subprime credit, according to an Experian study.
There are various ways you may find yourself with a subprime credit score, ranging from missed or late payments to excessive credit card balances.
While subprime borrowers frequently face disadvantageous loan terms, this is not always the case.
There is some positive news for homeowners considering a reverse mortgage.
While there are various prerequisites for loan eligibility, having a good credit score is not the only one.
Unlike standard forward mortgages, which are essentially determined by income and creditworthiness, reverse mortgage eligibility is determined by much more specifically, the available equity in the home.
One of the primary benefits of a reverse mortgage is that monthly payments are optional.
This eliminates the need for a strong credit score. While there is no minimum credit score required to qualify for the loan, a credit check will be conducted as part of the Financial Assessment.
The goal is to determine residual income and to ascertain whether you have any federal tax liens or overdue obligations that may affect your loan eligibility.
The Financial Evaluation
Although the qualification requirements for a reverse mortgage are less stringent than those for a traditional forward mortgage, borrowers must still meet loan requirements.
These criteria apply to reverse mortgages and include payment of property taxes, homeowners’ insurance, and ordinary home maintenance.
During the financial analysis, your lender will request permission to do a credit check to ensure that you have a stable track record of paying bills on time and the financial resources necessary to meet these loan conditions.
Fortunately, according to the Department of Housing and Urban Development, bad credit is not a sufficient cause to reject a prospective reverse mortgage borrower (HUD).
Lenders will do additional analysis of accounts in these instances to discover what may have contributed to late payments or overdue accounts, as well as whether there were any extenuating circumstances.
Even if your credit is less than ideal or your income is insufficient to fulfill loan requirements, you may still qualify for a reverse mortgage.
In certain circumstances, you may be obliged to purchase loan insurance through a Life Expectancy Set-Aside (LESA).
What exactly is a LESA?
A LESA is a fund set aside from the total eligible reverse mortgage loan amount to pay for property and insurance payments over the loan’s expected term.
A LESA is similar to an escrow account on a standard mortgage in that the lender establishes an account to make property tax and homeowners insurance payments on your behalf.
The amount to be set away in a LESA is determined by multiplying your projected life expectancy in years by the project’s property taxes and homeowners’ insurance.
For instance, if your expected life expectancy is 25 years from the time you obtain your reverse mortgage and your yearly housing expenses are predicted to be $5,000, your LESA would be $125,000.
While this amount deducts from your available loan balance and reduces your maximum loan amount, the benefit is that a LESA can help eliminate the risk and worry associated with loan default due to non-payment of taxes and insurance.
This peace of mind can go a long way toward ensuring that your older years are as peaceful and relaxing as possible.
Will a Reverse Mortgage Affect My Credit Score?
Excellent question! A reverse mortgage has no effect on your credit score directly.
However, if you choose to use reverse mortgage cash to repay current obligations, you may notice a favorable change in your credit profile and possibly even a rise in your credit score!
Don’t allow subprime credit to bring you down! Even if you have some blemishes on your credit report, you may still qualify for a reverse mortgage.
What disqualifies you from getting a reverse mortgage?
Reverse mortgages have two primary qualification criteria—you must be at least 62 years old, and you must own a significant amount of equity in your home. 1 While the specific percentage of equity required varies across lenders, typically you’ll need at least 50%.
Is it possible to get a reverse mortgage with bad credit?
Fortunately, there is no minimum credit score required to be eligible for a reverse mortgage. As long as you have adequate income to cover future property charges, are not delinquent on federal debts, and meet other minimum requirements, you could qualify for a reverse mortgage even with a very poor credit score.
Can you be turned down for a reverse mortgage?
Yes. You could be turned down if you don’t meet all the requirements. Make sure you’re old enough, that your home is in good shape, and that your finances tick all the required boxes before applying for a reverse mortgage.
Do you have to have your house paid off to get a reverse mortgage?
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing indebtedness must be paid off.
How much money do you get with a reverse mortgage?
The amount of money you can receive from a reverse mortgage generally ranges from 40-60% of your home’s appraised value. The older you are, the more you can receive, as loan amounts are based primarily on your life expectancy and current interest rates.
What happens at closing with a reverse mortgage?
You can use your reverse mortgage proceeds to pay off the mortgage or other obligations. If existing liens are identified, the payoffs are updated accordingly. Your closing agent will pay off all existing liens, verify taxes are paid and make sure that you have a current homeowner’s insurance policy.
Are heirs responsible for reverse mortgage debt?
If the balance owed on the loan is more than the home is worth, your heirs won’t have to pay the difference. If your heirs sell the home, the lender will take the proceeds from the sale as payment on the loan, and the FHA insurance will cover any remaining loan balance.
How much lump sum can you get on a reverse mortgage?
The amount of money you can borrow depends on how much home equity you have available. You typically cannot use more than 80% of your home’s equity based on its appraised value. As of 2018, the maximum amount anyone can be paid from a reverse mortgage is $679,650. However, most people will be paid much less.
Who gets a home after a reverse mortgage?
An heir who wants to keep a house can either pay off the HECM or take out a new mortgage to cover the balance of the reverse mortgage. If the balance on the reverse mortgage is higher than the value of the home, heirs can buy the house for 95% of its appraised value.
Why would you get a balloon mortgage?
Why Get a Balloon Mortgage? People who expect to stay in their home for only a short period of time may opt for a balloon mortgage. It comes with low monthly payments and a much lower overall cost, since it is paid off in a few years rather than in 20 or 30 years like a conventional mortgage.
Can someone live with you if you have a reverse mortgage?
As long as you still live in the home, having a reverse mortgage does not change who can live with you. Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs).
Can only one spouse do reverse mortgage?
To qualify for a reverse mortgage, you have to be at least 62 years old. But if you’re old enough and your spouse is not, you can still take the loan by having your partner file as a “non-borrowing spouse.”
Why don’t banks recommend reverse mortgages?
Because they often involve high fees—and the interest accrues on an increasing loan balance—reverse mortgages are an expensive way to borrow money. These added costs can cut into your home equity and reduce your family’s inheritance when you die.
Can a 65 year old get a 30 year mortgage?
First, if you have the means, no age is too old to buy or refinance a house. The Equal Credit Opportunity Act prohibits lenders from blocking or discouraging anyone from a mortgage based on age.
Can you get a mortgage with only Social Security income?
Getting a mortgage when your only income is Social Security benefits is no different than applying for a home loan when you have a job. You’ll need a down payment, proof of income, a qualifying debt-to-income ratio and a viable credit score.
What is the oldest age you can get a mortgage?
Maximum age limits for mortgages many lenders impose an age cap at 65 – 70 but will allow the mortgage to continue into retirement if affordability is sufficient. Lender choices become more limited, but some will cap at age 75 and a handful up to 80 if eligibility criteria are met.
Can I get a reverse mortgage at 60?
To get a reverse mortgage, borrowers must be at least 62 years of age for the HUD HECM program and there are programs available down to age 55 on the jumbo or private reverse mortgage programs.
Who do you talk to about reverse mortgage?
To find a reverse mortgage counselor near you, search the HECM Counselor Roster or call (800) 569-4287. To find a reverse mortgage counselor that provides telephone and face-to-face counseling nationwide, use the HUD Intermediaries Providing HECM Counseling Nationwide list.
Can a reverse mortgage go into foreclosure?
A reverse mortgage foreclosure is when a lender requires full repayment of a reverse mortgage loan balance due to a “triggering event,” such as the death of all of the homeowners. However, there are other common events that can lead to a reverse mortgage foreclosure.
