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Reverse Mortgage Glossary

Extenuating Circumstances

HECM Reverse Mortgage Extenuating Circumstances

If an applicant fails to meet the satisfactory credit requirements of the HECM reverse mortgage program, it’s possible to overcome the bad credit by documenting extenuating circumstances.

Satisfactory credit is an important part of the financial willingness component of the new HECM financial assessment guidelines rolled out by FHA in 2014. The satisfactory credit test helps lenders determine if an applicant has demonstrated the willingness to keep up with financial obligations based on their credit history. This is an important consideration because applicants are required to keep up with property charges under the HECM program.

If an applicant fails to meet the satisfactory credit test, they may still qualify and avoid a life expectancy set-aside (LESA) by documenting extenuating circumstances beyond their control that led directly to the bad credit. Such events can include lost income due to the death of a spouse, a major medical issue, lost job, divorce, etc. It’s not uncommon for circumstances like these to lead to late payments, collections, or chargeoffs. If one or more extenuating circumstances can be documented and a reverse mortgage underwriter can clearly see the chain of events that led to the bad credit, it’s possible for the applicant to meet the satisfactory credit standard and avoid a LESA (or qualify at all).

Understand that extenuating circumstances can sometimes be a little subjective; what you may consider beyond your control may not necessarily be seen that way by the underwriter. A valid extenuating circumstance has to be pretty clear cut and you need to be able to document it thoroughly. A good reverse mortgage professional can help you figure out the documentation you might need.

If the credit problems were just the result of bad financial management, you may still qualify, but the lender may require a LESA.

If the credit report just shows bad financial management, it’s a good bet the loan won’t be approved at all.