In the traditional “forward” mortgage world, credit scores are extremely important. They directly impact what mortgage programs you qualify for and what interest rates you can get. Even ten points on your credit scores can make the difference between qualifying and not qualifying in some scenarios. In the reverse mortgage world it’s very different.
First, a few basics
The most common reverse mortgage by far 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.
You remain the owner of the home and are 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.
Note that the HECM isn’t the only reverse mortgage available, but it is by far the most common. What I will cover next is applicable just to the HECM; other reverse mortgage programs may have different lending guidelines.
What is the minimum credit score for reverse mortgage financing?
Because the HECM reverse mortgage 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. 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.
Financial assessment encompasses a broad set of HECM reverse mortgage qualifying guidelines rolled out by FHA in 2014.
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 expected life span.
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.
Credit scores don’t matter, but credit does
So, what is the minimum credit score for reverse mortgage financing? As we’ve discussed, there is no minimum credit score. 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 helps.
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. FHA could at some point 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.