One commonly held notion about reverse mortgage loans is that you need good credit to get one. While credit rating is considered in the underwriting process, it’s not the only—or even the most important factor. When a borrower applies for a reverse mortgage, the lender looks at their individual financial situation to determine the likelihood that they will be able to financially uphold the terms of their loan.
The following applies specifically to home equity conversion mortgages (HECMs), which are federally insured reverse mortgages. While proprietary reverse mortgages have similarities to HECMs, certain terms and requirements may differ.
What are the credit requirements for a HECM?
There is no target credit score required to get a HECM. In most circumstances, credit history, specifically payment patterns over the previous two years, holds more weight than the credit score.
In general, borrowers whose credit is considered satisfactory have:
- No “major derogatory credit” notices on revolving accounts for the previous 12 months. Major derogatory credit on revolving accounts includes any payments made more than 90 days after the due date, or three or more payments made more than 60 days after the due date
- Made all housing payments on time for the previous 12 months with no more than two 30-day late payments in the previous 24 months
- Made all installment payments on time for the previous 12 months with no more than two 30-day late payments in the previous 24 months
“Major derogatory credit,” according to the Federal Housing Administration (FHA), includes any payments on revolving accounts (i.e., credit cards) made more than 90 days after the due date or three or more payments made over 60 days after the due date.
Other credit issues that will impact your application, even if they happened over two years ago, include:
- Judgments
- Collections
- Charge-offs
- Delinquent federal non-tax debt
- Delinquent federal tax debt
- Delinquent FHA-insured mortgages
Judgments against you must be resolved or paid off before or at closing. If they are not, you must show that you have:
- Worked with the creditor to create a valid payoff schedule
- Show that you have made timely payments for the prior three months.
As for collections and charge-off accounts, these don’t necessarily need to be paid off or placed on a payment plan. You will, however, need to provide an explanation letter for each collection or charge-off.
Can I get a reverse mortgage if I have federal or tax debt?
Your lender will verify with a credit reporting agency whether you have a delinquent federal, non-tax debt. If the debt is valid and delinquent, you’ll be ineligible for a reverse mortgage until you pay it off. The good news is that this type of debt may be considered a mandatory obligation, which means you can pay it off in full at closing using your reverse mortgage proceeds.
If you owe federal taxes, you are ineligible for a reverse mortgage. You may become eligible if you pay off your debt at or before closing or if you have:
- A valid payment agreement with the IRS
- Made timely payments for the previous three months
Can I get a reverse mortgage if I’m behind on my mortgage?
Whether or not you are approved for a reverse mortgage will depend on the results of the financial assessment, which the lender must complete as part of any application. This assessment was created to ensure borrowers are willing and able to uphold the terms of their mortgage, i.e., pay taxes and property insurance and maintain the home. Applicants who are behind on their mortgage will need to document extenuating circumstances that explain the delinquency. Based on this information, the underwriter reviewing the financial assessment will consider these circumstances when making a determination.
If you are approved, you must pay off or resolve your outstanding mortgage debt to take out a HECM. The repayment of FHA-insured debt is considered a mandatory obligation of the HECM. However, you can use the proceeds at closing to pay it off.
Before you borrow
Determining whether a borrower satisfactorily meets the requirements of a HECM involves a detailed assessment of their individual situation. Before pursuing a reverse mortgage or any substantial financial decision, it’s wise to consult with a qualified finance professional who can help you understand and weigh your options.
