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Can I Get a Reverse Mortgage With Bad Credit?

Credit report graphicThe reverse mortgage loan program does not utilize credit scoring and does not use a debt to income calculation. The reverse mortgage, also known as a HECM loan (Home Equity Conversion Mortgage) depends on the underwriter to determine credit worthiness. Lenders are required to obtain a credit report from three credit reporting agencies. The "tri-merge" credit report is combined into one credit statement. The purpose of the credit history analysis is to determine if the applicant has demonstrated responsible management of debt, finances, and homeownership obligations.

The reverse mortgage guidelines require special attention to delinquent Federal debt. Any Federal judgment(s) or delinquent Federal debt must be paid-in-full or a satisfactory repayment plan between the prospective borrower and the Federal agency owed must be in place prior to closing of the HECM. If a payment plan was entered into, the borrower is required to have made timely payments for at least three months

Any delinquent Federal debts or liens against the real estate must not be in excess of the borrower's net principal limit, unless the borrower has a separate source of funds from which to draw and pay those debts. Liens against the real estate resulting from delinquent Federal debt must be satisfied or resolved.

Chapter 7 and chapter 13 bankruptcy

A Chapter 7 bankruptcy (liquidation) does not disqualify a mortgagor seeking to purchase a home with a HECM provided at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the mortgagor must have:
- re-established good credit, or
- chosen not to incur new credit obligations.
- An elapsed period of less than two years, but not less than 12 months, may be
acceptable if the mortgagor:
- can show that the bankruptcy was caused by extenuating circumstances
beyond his/her control; and
- has since exhibited a documented ability to manage his/her financial
affairs in a responsible manner.

A Chapter 13 bankruptcy does not disqualify a mortgagor seeking to
purchase a home with a HECM provided that the lender documents that:
- one year of the pay-out period under the bankruptcy has elapsed;
- the borrower's payment performance has been satisfactory and all
required payments have been made on time; and
- the borrower has received written permission from bankruptcy court to
enter into the mortgage transaction.
SOURCE: HECM Financial Assessment and Property Charge Guide

What is considered satisfactory credit for a Home Equity Conversion Mortgage (HECM) borrower?

The Mortgagee (Lender) may consider the Borrower to have satisfactory credit if:

the Borrower has made all housing and installment debt payments on-time for the previous 12 months and no more than two 30-day late mortgage or installment payments in the previous 24 months; and
the Borrower has no major derogatory credit on revolving accounts in the previous 12 months.

Major derogatory credit on revolving accounts shall include any payments made more than 90 Days after the due date, or three or more payments more than 60 Days after the due date.

If a Borrower’s credit history does not reflect a satisfactory credit as stated above, the Borrower’s payment history requires additional analysis.

Where a borrower does not meet the satisfactory credit standard, the Mortgagee must analyze the Borrower’s delinquent accounts to determine whether late payments were based on a disregard for financial obligations, an inability to manage debt, or extenuating circumstances. The Mortgagee must document this analysis in the mortgage file. Any explanation or documentation of delinquent accounts must be consistent with other information in the file.

Where the Borrower has not demonstrated the willingness to meet his or her financial obligations as stated above and no extenuating circumstances can be documented, the Mortgagee must require a Fully-Funded Life Expectancy Set-Aside (See Sections 5.4 and 5.9 of the Financial Assessment and Property Charge Guide). SOURCE: HUD/FHA Knowledge Base

Life expectancy set-aside (LESA)

If the borrower's credit profile is deemed lacking, the HECM program requires the lender to set aside a sufficient amount of money to pay the property expenses (i.e. property taxes, homeowner's insurance, and flood insurance, if necessary), for the estimated life of the borrower. The set aside is a reduction from the maximum loan amount available to the borrower. For example, if the maximum loan amount is $100,000 and the property taxes, homeowner's insurance and other mandatory expense total $60,000 over the anticipated life expectancy of the borrower, the available loan balance is reduced to $40,000.

Residual analysis

As stated earlier, the HECM loan does not employ a debt to income ratio, but does require borrowers to have sufficient income to meet their monthly expenses. The debt to income assessment is called residual analysis. The residual analysis is similar to the way the Veteran's Administration gauges income to debt for veteran loan borrowers. Applicants should exceed the following income guidelines after monthly expense:

Residual Income by Region
Family Size Northeast Midwest South West
1 $540 $529 $529 $589
2 $906 $886 $886 $998
3 $946 $927 $927 $1,031
4 or more $1,066 $1,041 $1,041 $1,160

Region States
Northeast CT, MA, ME, NH, NJ, NY, PA, RI, VT
Midwest IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI
South AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK, PR, SC, TN, TX, VA, VI, WV
West AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY

Lenders are permitted to make reasonable adjustments to both income and debt. For example, if the monthly income from a reverse mortgage can be used as additional income to meet the residual income limits.

Frequently Asked Questions About HECM Loans

Does a Reverse Mortgage hurt your credit?

Since there are no payments with a reverse mortgage, most lenders do not report to credit agencies.

Do you need good credit to get a reverse mortgage?

"Good credit" is not required with reverse mortgages; however, there are some limitations. For example, delinquent federal debt can stop a reverse mortgage application, unless the delinquent debt is paid off under the reverse mortgage or extinguished prior to settlement. Late payments on credit cards and installment loans are usually ignored by lenders.