How Credit History Can Delay the Reverse Mortgage Loan Process
Court judgements and outstanding state or federal tax liens can blemish your credit history and make it difficult to borrow money. These derogatory marks on your credit report can also hinder your ability to get a reverse mortgage.
A reverse mortgage allows homeowners age 62 and older to borrow against their home equity, which they may receive as a line of credit, in a lump sum or monthly loan disbursements. The loan is generally repaid when the borrower passes away or otherwise permanently vacates the home.
To qualify, a loan applicant must be at least 62 years old, have sufficient home equity and pass a financial assessment that determines if the applicant has the willingness and capacity to sustain the reverse mortgage, while also being able to make timely payment of property taxes, homeowner’s insurance, or any other property charges that are applicable.
Loan applicants may still be able to qualify if they have an existing mortgage, however, the reverse mortgage must be in the first lien position, so any existing debt must be paid off before proceeding with the reverse mortgage.
When lenders conduct a financial assessment, not only will they review any and all sources of the applicant’s income, but they will also look at the person’s credit profile, including the applicant’s history of paying property charges. If a lender finds that an applicant has any payment delinquencies, court judgements or state/federal tax liens, this raises a red flag that requires immediate attention.
Tax liens and judgements
The appearance of any court judgements or state/federal tax liens on an applicant’s credit history will require the lender to halt processing of the reverse mortgage application until these matters are resolved.
Tax liens are the government’s claim against all or some of your assets based on your failure to pay a tax debt on time. They may occur locally at the state level or at the federal level.
You may have a tax lien on your credit history if you haven’t paid or owe property taxes, or if you have any back payments on your income taxes.
Court judgements are different from tax liens, however, they are treated in the same manner during the reverse mortgage loan process. Credit report agencies commonly obtain judgement records from courthouses and place them on consumer credit report cards, where they are allowed to remain for seven years from the filing date, according to Credit Sesame.
Resolving outstanding debts
Individuals with delinquent tax debt will be required to work with the IRS to establish a valid repayment plan to satisfy the debt. To be eligible for a reverse mortgage, these prospective borrowers will be required to make timely payments on that repayment plan for at least three months.
Prospective borrowers carrying delinquent tax debt also have the option to repay the debt out-of-pocket using their own resources, if available.
It is important to note that while you can use the loan proceeds from a reverse mortgage to pay down an existing mortgage balance, you cannot use the loan proceeds to pay off tax liens, according to the Department of Housing and Urban Development, which regulates the federal Home Equity Conversion Mortgage (HECM) reverse mortgage program.
It’s in the best interest of anyone who is planning to apply for a reverse mortgage to first make sure they do not have any outstanding liens or judgements against them.
But if they do, then these matters must be addressed before moving forward with the loan process, whether that means satisfying the debt by paying it in full, or establishing a repayment plan to get on the right track.
If you are considering applying for a reverse mortgage and would like to learn more about the qualifications for this loan product, request your quote today!