credit history and reverse mortgage

Credit is confusing. If you’re wondering how to find your credit report, how to improve your credit history, or how it will affect your ability to get a reverse mortgage, you’re not alone. Many Americans have a vague understanding of credit and the importance of maintaining a high credit score and a good credit history, but few are aware of the subtle impacts that credit can have on the major purchases that matter to you. Examining a potential borrower’s credit gives a lender a much better understanding of how likely it is that the borrower’s debts will be repaid on time. Before we learn about the effects of credit on your ability to get a reverse mortgage, let’s take a closer look at the concept of credit.

What is Credit History?

You have a credit history if you have ever had a credit card or taken out a loan from a financial institution. Credit history tells the story of your experience in borrowing money and paying that money back. It is a record of how you use money and how you repay debts, showing how you handle your financial responsibilities. If your credit history shows a ton of late payments, missed payments, debt collections, etc., many lenders will not loan to you because they aren’t sure if they will get their money back.

Credit history may include your credit cards, loans, and mortgages to see how many credit accounts you have. Too many accounts may show that you are desperate for cash, or that your debt-to-income may be high. Every time you apply for a new line of credit, it shows up on your credit history. Too many inquiries in a short amount of time looks bad to a lender. And, of course, your payment history and any delinquencies are also on your credit report. If you are always paying late or missing payments, that shows the lender that you are a risk.

Financial Assessment, the LESA, and Your Credit History

In the past, credit had no impact on a person’s ability to get a reverse mortgage. However, as defaulting loans reached higher levels, the federal government stepped in to protect seniors and help enable them to succeed with their loans. Ever since the introduction of financial assessment in 2015, reverse mortgage lenders have examined each potential client’s credit history while also conducting a cash/residual income analysis. As a client, you might expect a bit of additional paperwork, which the lender will use to determine if you are likely to stay up to date on such financial obligations as paying property taxes, homeowner’s insurance, and home maintenance costs. While this assessment does put an extra obstruction on the process, it has had beneficial effects on seniors who might have otherwise fallen into default.

Even if a financial assessment determines that a client may have issues keeping up with the obligations of the loan, alternative solutions exist to enable these clients to benefit from a reverse mortgage. In particular, the Life Expectancy Set Aside (LESA) has been created by HUD to protect borrowers who may be at risk. Lenders must set aside either a portion or the entirety of reverse mortgage proceeds if it is determined that the client does not meet the HUD guidelines laid out in the financial assessment. Based on these results, a client may only need a partial LESA, meaning that they will still be able to make use of the remaining proceeds as they see fit.

Make Your Credit Work For You

Rebuilding your credit history takes time. Delinquencies, bankruptcies, unpaid tax liens, and inquiries can remain on your report for years – up to 10 years, in fact. Some ways to jumpstart the process is practicing good credit behavior now. Quick tips include keeping your credit card spending in check, eliminating small balances that linger on credit cards from month to month, knowing when to apply for credit, paying bills on time, paying more than the minimum balance, and avoiding missed payments and other minor incidents that could detract from a good score. If you’d like to know more about how your credit will affect your ability to get a reverse mortgage, feel free to contact us.