While credit history is an important qualifying factor for reverse mortgage borrowers, it is not something that will likely make or break the borrower’s opportunity for approval. Since the borrower is not required to make monthly payments, there is no minimum income or credit requirement. However, it is important for the lender to determine whether or not the borrower is financially fit to maintain ongoing homeowner expenses to avoid foreclosure of reverse mortgage. For this reason, the federal government requires lenders to obtain tri-merge credit reports, which are then used to conduct a thorough financial assessment.
Financial Assessment
When conducting a financial assessment, lenders will analyze a two-year history of accounts including credit, taxes/homeowner’s insurance, and HOA. The borrower’s credit is considered to be satisfactory if all housing payments and debt installments have been paid off on time for the past 12 months. If the borrower incurred two or fewer late payments within the past 24-month, their credit is still considered satisfactory if these debts were paid within 30 days. Additionally, to qualify for satisfactory credit, the borrower should have no major derogatory credit within the 12 months. According to HUD, major derogatory credit refers to any revolving credit payments which are more than 90 days delinquent, or three or more revolving payments which are 60 days delinquent.
If the borrower meets these criteria, they are approved to move forward with the reverse mortgage process. However, if the borrower fails to meet these qualifications, they will not be immediately rejected. The FHA recognizes that good people can have bad credit due to uncontrollable circumstances such as illness or job loss. Subsequently, the credit history of said borrowers will simply be subject for further review by the lender.
Credit Review
In this review, lenders will be looking to determine the reasons for late payments, charge-offs, collection accounts, bankruptcies, etc. Examining such discrepancies in respect to how they reflect on the borrower’s financial habits.
Lenders will add up payments from all the borrowers credit accounts as expenses. For this reason, it is important that potential borrowers are careful in using their credit accounts. To ensure positive credit review results, applicants should not use these accounts for anything they will not be able to pay for in full when the bill becomes due. Failure to pay will result in late payments that can hurt an applicant’s creditworthiness down the road.
Isolated late payments are not necessarily detrimental to a borrower’s creditworthiness; however, frequent lates may be a red flag to lenders. Frequently occurring sporadic lates are much worse than successive late payments when it comes to creditworthiness. This is because the successive lates or “rolling lates” accumulate and only count as one late, while sporadic late payments are all considered individual lates.
While late payments can be extremely damaging to a borrower’s creditworthiness, completely failing to pay off a debt is even more detrimental. When a borrower misses too many payments, the creditor eventually gives up on collecting payments and lists the account as a charge-off or writes off the debt as a loss and sells it to a collection agency. In both instances this delinquency will appear as a derogatory mark on the borrower’s credit report. Even after they have paid off all remaining balances, their credit score will still account for this blunder. When reviewing charge-offs and collections for reverse mortgage qualification, lenders often require the borrower to provide a written letter of explanation for each occurrence.
Late payments are typically more damaging than bankruptcy; however, both Chapter 7 and Chapter 13 bankruptcies will affect the borrowers credit score equally. If the applicant has a current or previously closed bankruptcy, they may still qualify for a reverse mortgage if the appropriate time has passed since discharge and the proper paperwork is provided (see Bankruptcy Guidelines for more). In this case, the lender will be looking to make sure the borrower meets the qualifying guidelines in order to proceed with the reverse mortgage process.
While every individual has their own credit score, it is important to note that joint accounts will impact individual credit. If the applicant has a joint account, poor credit on behalf of another affiliate will in fact count against the applicant’s credit, even if they exhibit no delinquencies. For this reason, lenders will closely review these joint accounts and ensure that the borrowing applicant is not the affiliate with harmful credit habits.
Further, if the borrower has any court ordered judgements against them, these must be resolved or paid off prior to closing a reverse mortgage loan. However, if the borrower is not able to pay off these judgments prior to closing, they must provide the lender with proof of a valid agreement with the creditor to make monthly payments in order to pay off the outstanding debt. The borrower must also prove that over the past three months they have made these payments in a timely manner. Similarly, applicants with delinquent federal tax debt may also provide proof of agreement and payoff to exhibit creditworthiness.
However, when it comes to delinquent federal non-tax debt, the borrower will not be able to take out a reverse mortgage until these delinquencies have been resolved. Under particular circumstances, the debt may be considered a mandatory obligation. In this situation, an exception can be made and the proceeds from the reverse mortgage may be used to pay off this debt upon closing. The same pay-off exceptions may apply to applicants with delinquent FHA mortgages.
LESA
In reviewing all of these items, lenders are looking to verify that the borrower has no poor payment habits. If the lender determines that is necessary, they may require the borrower to set up a Life Expectancy Set Aside (LESA).
A LESA is simply an account where a chunk of the principal limit is set aside and preserved to cover property taxes and insurance costs. The specified amount is dependent on the borrowers income, credit, monthly property taxes/insurance costs, and the life expectancy of the youngest borrower. These accounts relieve the borrower from having to worry about keeping up with these homeowner dues, allowing the cash received from the reverse mortgage to be used freely for other needs or desires.
Future Credit
Many reverse mortgage borrowers are also concerned with how a reverse mortgage will affect their credit moving forward. Because reverse mortgages require zero monthly payments, lenders typically do not report to credit agencies. As a result, taking out a reverse mortgage will not tarnish a borrower’s credit score.