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.
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 late payments 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.
- No major derogatory credit items such as collections, charge offs, bankruptcies, foreclosures, short sales, judgments, delinquent federal debt (tax or otherwise), in the last few years. The HECM guidelines don’t specify how many years back the lender must look for these kinds of derogatory credit items, so there may be some variation from lender to the next.
If you have major derogatory credit in your recent credit history (charge offs, collections, bankruptcies, etc.), your lender will need to determine if the derogatory credit was the result of financial mismanagement or extenuating circumstances beyond your control. If it was the result of financial mismanagement, the lender may only approve your reverse mortgage with a LESA.
You may be able to avoid a LESA by documenting a valid extenuating circumstance (such as loss of job, serious illness, loss of spouse’s income, etc.) with letters of explanation and supporting documentation for each derogatory credit item.
Additional guidelines apply to each specific derogatory credit type:
- Collections – If you have a total of $2,000 or more in total collection account balances on your credit, your lender may also have to assume a payment of 5% of the outstanding balances when calculating your residual income. This requirement can sometimes make it difficult to qualify if you have large collection balances.
- Judgments – A judgment is considered resolved (meaning no further action is needed on it) by the lender if you’ve entered into a valid repayment agreement, have made at least three monthly payments, and the judgment will not take priority over the reverse mortgage lien. Note that you cannot prepay the three monthly payments; they must be paid on a monthly basis for three consecutive months. If you don’t have a repayment agreement in place, the lender will require you to pay off the judgment prior to or at closing. If the judgment is attached to the title of your home, you can use the proceeds to pay it off. If it’s not attached to the title of your home, you’ll have to either pay it off before closing or enter a valid repayment agreement and reapply once three monthly payments have been made.
- Delinquent federal non-tax debt – If you have this kind of debt, you likely will be ineligible for a HECM reverse mortgage until the debt is resolved.
- Delinquent mortgages – If you have a delinquent FHA-insured mortgage on your primary residence that will be paid off by the reverse mortgage, you may still be able to qualify as long as you meet the other HECM lending guidelines. If you have a delinquent FHA mortgage on a property other than your primary residence, you will be ineligible until the delinquency is resolved.
- Delinquent federal tax debt – You are ineligible for a HECM reverse mortgage if you have delinquent federal tax debt unless you have a valid repayment agreement in place and at least three monthly payments have been made. Note that you cannot prepay the three months of payments; they must be made on a monthly basis over three consecutive months.
Disputed derogatory credit
Disputed medical accounts and derogatory credit resulting from identity theft do not need to be included in the financial willingness evaluation. If the derogatory credit was the result of identity theft, expect your lender to ask for a copy of a police report or other supporting documentation.
You don’t need to have perfect credit to qualify
Yes, HECM lending guidelines are more stringent than they used to be, but you don’t need to have perfect credit to qualify. As long as you pay your bills at least reasonably well, it’s a good bet the reverse mortgage will work from a credit standpoint.
If you have a spotty payment history, you may still be able to qualify with an extenuating circumstance or a LESA.