What is the minimum credit score for reverse mortgage financing? Can you qualify for a reverse mortgage with bad credit? You may be surprised by the answers to these questions.
In the traditional “forward” mortgage world, credit scores are extremely important. There’s a big difference between a 741 and a 641 when it comes to qualifying, closing costs, and interest rates. If you’re below 620, you likely won’t qualify at all.
In the reverse mortgage world it’s very different. Before we explain, let’s first cover a few basics about reverse mortgages.
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Reverse Mortgage Basics
The most common reverse mortgage in America today is the FHA-insured home equity conversion mortgage, or HECM. The HECM is designed to enable seniors 62 and older to convert a portion of their home’s value into cash.
No payments are required as long as at least one borrower (or non-borrowing spouse) is living in the home and paying the required property charges.
You remain the owner of your home and you’re free to leave it to your heirs. Your heirs will inherit any equity remaining in the home.
The HECM is a non-recourse loan; the most that will have to be repaid is the value of the home. If there’s not enough value in the home to pay off the entire balance, FHA will settle the shortage.
The bottom line is that the HECM is simply a home loan. The bank is not buying your house and you’re not otherwise giving up ownership of your home.
Because the HECM is a home loan, yes, credit is important. However, credit is evaluated differently than it would be for other home loan products. As we’ll cover, you don’t need perfect credit to qualify.
What is the Minimum Credit Score for a Reverse Mortgage?
So, what is the minimum credit score for a reverse mortgage? The answer may surprise you!
Because the HECM requires no payments, credit scores themselves don’t matter. There is no minimum credit score.
Now, to be clear, that doesn’t mean credit doesn’t matter at all. Credit scores themselves don’t matter, but the story they tell does. Again, there is no minimum credit score for reverse mortgage financing, but lenders will still analyze your credit history using guidelines called financial assessment.
How Financial Assessment Works
Financial assessment encompasses a broad set of HECM reverse mortgage requirements rolled out by FHA in 2014. The updated guidelines included many new credit and income requirements for reverse mortgage lenders to comply with.
Defaults due to nonpayment of taxes and insurance were a growing problem in the late 1990s and early 2000s and led to losses and bad headlines for the HECM program. FHA implemented financial assessment to improve applicant quality and reduce the risk of defaults.
Reverse mortgage lenders must now conduct a more in-depth analysis of an applicant’s credit history and income. The intent is to reduce reverse mortgage defaults by weeding out applicants with exceptionally poor income and credit histories.
Note that you do not need to have perfect credit to qualify. You can have a recent bankruptcy, late payments, and even a recent foreclosure and still potentially get a HECM reverse mortgage.
However, if your credit profile fails to meet the satisfactory credit guidelines, the lender may require that a life expectancy set aside, or LESA, be set up. A LESA is designed to pay the property taxes and homeowners insurance for the rest of your estimated life span (based on government life expectancy tables).
A LESA can be a positive thing because it means you no longer have to worry about paying property taxes and homeowner’s insurance. However, you need to have enough equity to set it up. If you have a large mortgage balance, high property taxes, or expensive homeowner’s insurance, there may not be enough money in the reverse mortgage to set up the LESA. The loan would be short to close, which means you would need to pay money into the reverse mortgage to make the numbers work. If that’s not possible, then the reverse mortgage wouldn’t be a workable option for you.
What is the Minimum Credit Score for Reverse Mortgages?The credit qualifications for a HECM reverse mortgage are unique among home loan products. There is no minimum credit score for reverse mortgage financing.
The Importance of Credit History
So, what is the minimum credit score for reverse mortgage financing? As we’ve discussed, there is no minimum credit score for reverse mortgages.
Though credit scores themselves don’t matter when getting a HECM reverse mortgage, your credit history definitely does. You don’t need to have perfect credit, but it certainly doesn’t hurt.
A LESA can often compensate for poor credit or low income, but you need to have enough available money in the reverse mortgage to set it up.
Keep in mind that FHA has substantially tightened up the lending guidelines for the HECM reverse mortgage in recent years. There is no minimum credit score for reverse mortgages today, but FHA could decide to implement a minimum credit score if they believe it will limit defaults. Don’t assume that a HECM reverse mortgage will always be available as a last resort even if you have terrible credit scores.
The best time to get a reverse mortgage is before you’re in a bad financial situation. The HECM reverse mortgage is best used not as a last resort, but as a safety net before you get into financial trouble.
Can you be turned down for a reverse mortgage?
As long as you meet the basic eligibility requirements such as age, property type, owner occupancy, etc., it’s relatively difficult to be turned down for a reverse mortgage. The most common reason applicants are turned down is because they don’t have enough equity in their homes.
Can I get a reverse mortgage with bad credit?
Yes, you can potentially get a reverse mortgage with bad credit. There is no minimum credit score for reverse mortgages, but the lender will still evaluate your credit and property charge payment history.
What disqualifies you from getting a reverse mortgage?
As long as you meet the basic eligibility requirements such as age, property type, owner occupancy, etc., it’s relatively difficult to be turned down for a reverse mortgage. The most common reason applicants are turned down is because they don’t have enough equity in their homes. There is no minimum credit score for reverse mortgages, so credit scores are not a reason people are disqualified.
Does your credit score matter for a reverse mortgage?
There is no minimum credit score for reverse mortgages, but the lender will still evaluate your credit and property charge payment history.