Can you get a reverse mortgage with bad credit? Yes, you can get a reverse mortgage with bad credit, but there are some caveats. Reverse mortgages are more forgiving from a credit standpoint than other mortgage products, but there are still some minimum standards that you must meet.
A reverse mortgage is a unique home loan product that enables homeowners 62 and older to borrow against home equity without a mortgage payment.
The most popular reverse mortgage in America is the FHA-insured home equity conversion mortgage, or HECM. If you know somebody who recently got a reverse mortgage, it likely was a HECM.
How a HECM Reverse Mortgage Works
If you’re at least 62 and a homeowner, the HECM enables you to convert home equity into cash. No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home, maintains it, and pays the required property charges.
The HECM becomes due and payable when the last borrower (or non-borrowing spouse) no longer lives in the home and pays the required property charges.
You always remain the owner of your home, which means you can leave it to your heirs. Your heirs can inherit any remaining equity in the home, whether they choose to keep it or sell it.
The HECM is a non-recourse loan. FHA will covers any shortage if your home isn’t worth enough to pay off the entire loan balance.
The HECM is versatile and customizable, which means you can tailor it to your individual financial goals and needs. Proceeds are available as a lump sum, line of credit, monthly term/tenure income, or some combination of these options.
Can I Get a Reverse Mortgage With Bad Credit?
Because reverse mortgages don’t require mortgage payments, they historically have had few credit qualifying requirements. That changed in 2014 when FHA implemented new qualifying guidelines called financial assessment. The goal of financial assessment was to ensure that applicants will continue to pay their property charges, which is a key requirement of the HECM program.
Yes, HECM lending guidelines are more stringent than they used to be, but you don’t need perfect credit to qualify. As long as you pay your bills at least reasonably well, your credit will likely be fine.
However, if you have a spotty payment history or major derogatory credit, you may still qualify.
What Reverse Mortgage Lenders Look For
FHA requires reverse mortgage lenders to analyze your credit history based on a tri-merge credit report that includes data from TransUnion, Equifax, and Experian.
Unlike in the “forward” mortgage world, the credit scores themselves don’t matter. It doesn’t matter if you have a 674, 703, 682, or 600 credit score. What matters is payment histories and the presence of derogatory credit like collections, charge offs, bankruptcies, foreclosures, etc.
To have satisfactory credit, you must have:
- Made all housing and installment debt payments on time for the previous 12 months. You must also have no more than two 30-day late mortgage or installment loan payments in the previous 24 months.
- No seriously late payments on revolving accounts in the previous 12 months. A revolving account is not derogatory as long as there are no 90-day late payments and no more than three 60-day late payments in the last 12 months.
- No major derogatory credit such as collections, charge offs, bankruptcies, foreclosures, short sales, judgments, and delinquent federal debt (tax or otherwise) in the last few years. The guidelines aren’t specific about the lookback timeframe, so there may be some variation from one lender to the next.
If you have derogatory credit in your recent credit history, the lender will determine if it was because of financial mismanagement or extenuating circumstances beyond your control.
If the derogatory credit resulted from financial mismanagement, the lender may only approve your reverse mortgage with a LESA.
You may be able to avoid a LESA by documenting an extenuating circumstance. Valid extenuating circumstances include loss of job, serious illness, loss of spouse’s income, etc.
You Do Not Need Perfect Credit to Qualify
It doesn’t hurt to have great credit when applying for a reverse mortgage, but it’s not required. Again, reverse mortgage lenders don’t care about your credit scores themselves. As long as you pay your bills reasonably well, your credit will likely qualify.
Even if your credit doesn’t pass, you may still be approved with a LESA or extenuating circumstance.