How Will a Lender Examine My Credit History and What Do I Need to Know?
Whether you’re looking to supplement your retirement income, make repairs to your home or buy a new house altogether, a reverse mortgage can help.
But there will soon be a few additional steps to taking out a reverse mortgage, making the process more like that of getting a traditional “forward” mortgage.
An important part of qualifying for a reverse mortgage is the evaluation of a borrower’s credit history. Here’s what you need to know:
Credit history review
Your lender will evaluate your credit history as part of the financial assessment, and will require a credit report to document that history for all borrowers.
However, failure to prove satisfactory credit is not necessarily a reason to reject a borrower, according to the Department of Housing and Urban Development (HUD), which set the new rules.
Instead, it means that if your credit is not satisfactory, lenders must conduct further analysis of your accounts to determine the reason for things like late payments or overdue accounts (if they apply), and whether there are extenuating circumstances that may have caused them.
The lender may determine that the borrower has satisfactory credit if:
- The borrower has made all housing and installment payments on time for the previous 12 months, and has no more than two 30-day late housing or installment payments in the previous 24 months.
- The borrower has no “major derogatory credit” on revolving accounts in the previous 12 months.
HUD defines major derogatory credit as any revolving credit payments within the last 12 months being more than 90 days late, and/or three or more revolving credit payments within the last 12 months being more than 60 days late.
In assessing your creditworthiness, lenders will evaluate payment histories in the following order:
- Current or previous mortgage debt and housing-related expenses
- Installment debts
- Revolving accounts
Lenders will also look into a number of other credit issues. If these items appear on your credit report or other records, they must be addressed even if the issues are more than two years old.
Among other things, these credit issues might include:
Collections and charge-off accounts — While these do not have to be paid off or placed under a payment plan, the lender must determine why these accounts were placed in collection or charged off.
Additionally, the borrower must provide a letter of explanation for each collection or charge-off account.
Judgments — These must be resolved or paid off prior to or at closing. If they are not paid off, the borrower must:
- have entered into a valid agreement with the creditor to make regular payments, and
- have made timely payments for the last three months
Delinquent federal non-tax debt — If it is determined that a borrower has delinquent federal non-tax debt, the lender must verify it with a creditor agency.
If the creditor agency verifies the debt is valid and delinquent, then the borrower is ineligible for a reverse mortgage until the delinquency is resolved.
However, this debt may be considered a mandatory obligation and may be paid off at closing using the reverse mortgage proceeds.
Delinquent federal tax debt — Borrowers with delinquent federal tax debt are ineligible for a reverse mortgage.
To become eligible, the borrower must either pay off the debt (before or at closing) or:
- have entered into a valid agreement to make regular payments, and
- have made timely payments for at least three months
Delinquent Federal Housing Administration-insured mortgages — Borrowers with delinquent FHA-insured mortgages are ineligible for a reverse mortgage until the delinquency is resolved.
However, if the reverse mortgage proceeds will be used at closing to pay off the delinquent FHA-insured mortgage on the borrower’s principal residence, then the borrower is eligible.
Other delinquent FHA-insured mortgages:
- Must be resolved before the application can continue to be processed
- Are not mandatory obligations and may not be brought current or paid off at HECM closing using the reverse mortgage proceeds
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