Satisfactory credit

HECM Reverse Mortgage Satisfactory CreditSatisfactory credit is an important part of the financial willingness component of the HECM reverse mortgage 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 borrowers are required to keep up with property charges under the HECM program.

If an applicant fails to demonstrate satisfactory credit, they may be able to avoid a life expectancy set-aside (LESA) by documenting extenuating circumstances that led to the bad credit.

How satisfactory credit is determined

Reverse mortgage lenders analyze an applicant’s 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. What is most important is the payment histories for the various accounts reporting in the credit file. To have satisfactory credit, an applicant must have:

  • Made all housing and installment debt payments on time for the previous 12 months and have no more than two 30-day late mortgage or installment payments in the previous 24 months
  • No major derogatory credit on revolving accounts in the previous 12 months. A revolving account is not considered 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.

As you can see, an applicant doesn’t need to have perfect credit to meet the satisfactory credit standard. As long as bills are paid on time at least reasonably well, it’s a good bet the loan will work from a credit standpoint.

However, if the applicant fails to meet the satisfactory credit standard, it may be possible to qualify without a LESA by documenting extenuating circumstances. Extenuating circumstances are events beyond the applicant’s control that led directly to the bad credit; such events could include loss of job, a major medical issue, divorce, death of spouse, etc.

If one or more extenuating circumstances cannot be documented, a LESA may be required. If the credit history is bad enough, it’s possible the applicant won’t qualify at all, with or without a LESA.