In 2014, FHA rolled out stricter qualifying guidelines for the HECM reverse mortgage. Called financial assessment, the new guidelines requirement applicants to document that they have the financial ability and financial willingness to pay the required property charges (a key requirement of the HECM program).
Satisfactory credit is an important part of the financial willingness component of financial assessment. The satisfactory credit “test” is based on credit history and helps lenders determine if an applicant has demonstrated a willingness to keep up with financial obligations. Applicants with excellent credit are more likely to keep up with property charges as well.
Applicants who fail the satisfactory credit test may still qualify by documenting certain extenuating circumstances 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.
If one or more extenuating circumstances cannot be documented, the underwriter may still approve the file with a life expectancy set-aside, or LESA.
It’s important to understand that extenuating circumstances can 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 is needed.