Is it possible to get a reverse mortgage with bad credit? Learn the answer to this question and what you can do if you want a reverse mortgage with bad credit.
It’s no secret that there are various standards you must initially complete when applying for a mortgage loan, whether forward or reverse.
In the case of a classic ‘forward’ mortgage, having a respectable credit score is likely the scariest of these requirements.
After all, the better your credit score is, the better your loan terms are likely to be.
But, when applying for a reverse mortgage, what does your credit score mean?
As the name implies, reverse mortgages differ from standard forward mortgages in several ways, the most significant of which is the necessity of your credit score in receiving the loan.
Credit scores are a three-digit figure calculated based on your credit accounts to indicate how likely you are to return borrowed money and expenses.
They are normally on a scale of 300 to 850. Credit bureaus such as Equifax, Experian, and TransUnion compile this information.
While credit score requirements differ every bureau or credit reporting agency, there are some fundamental guidelines that define your creditworthiness:
Credit scores of:
720 or higher are considered “excellent.”
690 to 719 are considered “good.”
640 to 689 are considered “fair.”
629 or less are considered “bad.”
So, what does it imply if your credit score isn’t exactly perfect? Nearly one-third of Americans have subprime credit, according to an Experian study.
There are various reasons you may have a subprime credit score, ranging from missed or late payments to excessive credit card balances.
While subprime borrowers are frequently offered disadvantageous financial terms, this is not always the case.
There is some positive news for anyone considering a reverse mortgage to access their home equity.
While having a decent credit score is one of the prerequisites to qualify for the loan, it is not the only one.
Unlike standard forward mortgages, which are based solely on income and creditworthiness, reverse mortgage eligibility takes into account a lot more, including the amount of equity in the home.
One of the biggest advantages of a reverse mortgage is that monthly payments are optional2, so you don’t need a perfect credit score.
While there is no minimum credit score to qualify for the loan, as part of the Financial Assessment, you will be subjected to a credit check.
The goal is to figure out your residual income and see if you have any federal tax liens or unpaid obligations that could influence your loan eligibility.
The Financial Evaluation
Although reverse mortgage qualifying standards are less stringent than those for a regular forward mortgage, borrowers must still meet lending requirements.
These obligations on a reverse mortgage include paying property taxes, homeowners’ insurance, and general home maintenance.
Your lender will request permission to do a credit check during the financial analysis to ensure that you have a good track record of paying bills on time and that you have the financial resources to meet the loan requirements.
According to the Department of Housing and Urban Development, having bad credit isn’t always a reason to turn down a potential reverse mortgage borrower (HUD).
In these cases, lenders will look into the accounts further to see what caused the late payments or outstanding accounts, as well as whether there were any extenuating circumstances.
Even if your credit is less than ideal or your salary is insufficient to fulfill loan requirements, you may still be eligible for a reverse mortgage.
You may be obliged to choose loan insurance through a Life Expectancy Set-Aside in some instances (LESA).
What is a LESA?
A LESA is a pool of cash set aside from your total possible reverse mortgage loan amount to help pay for property and insurance charges over the loan’s expected term.
A LESA is comparable to an escrow account on a typical mortgage, where the lender sets up an account to make property tax and homeowners insurance payments on your behalf.
It’s designed to help borrowers with limited income or bad credit. The amount of money to put into a LESA is determined by multiplying your projected life expectancy in years by your project property taxes and homeowners’ insurance.
Your LESA would be $125,000 if your life expectancy is 25 years from the time you take out your reverse mortgage and your annual housing expenses are estimated to be $5,000.
While this money comes out of your available loan balance3 and lowers your maximum loan amount, the benefit is that a LESA can assist you avoid defaulting on your loan due to unpaid taxes and insurance.
Having this peace of mind can go a long way toward making your golden years as stress-free as possible.
Is a reverse mortgage going to hurt my credit?
A reverse mortgage has no effect on your credit score directly. If you employ reverse mortgage funds to pay off existing obligations, however, you may notice a favorable change in your credit profile — and higher credit scores!
Don’t allow bad credit to get the best of you! Even if your credit isn’t perfect, you might be able to get 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.