Credit scoring or debt-to-income ratio computations are not used in the reverse mortgage lending scheme.
The creditworthiness of the reverse mortgage, commonly known as a HECM loan, is determined by the underwriter (Home Equity Conversion Mortgage). Lenders are required to acquire credit reports from three different credit reporting organizations.
The credit report from the "tri-merge" is combined into a single credit statement.
The credit history study determines if the applicant has shown appropriate debt, financial, and mortgage management.
The rules for reverse mortgages require that overdue federal debt be given particular attention. Prior to the HECM closure, any Federal judgment(s) or overdue Federal debt must be paid in full or an acceptable repayment plan must be in place between the prospective borrower and the Federal agency owing.
If a payment plan was set up, the borrower had to make on-time payments for at least three months.
The reverse mortgage guidelines demand that delinquent federal debt is given special consideration. Any Federal judgment(s) or delinquent Federal debts must be paid in full or a satisfactory repayment plan must be in place between the prospective borrower and the Federal agency owed prior to the HECM closing.
If a payment plan was established, the borrower must have made on-time payments for at least three months.Any delinquent Federal obligations or liens against real estate shall not exceed the borrower's net principal limit, provided the borrower has a separate source of money to draw and pay such debts.
Liens on real estate due to overdue federal debt must be settled or resolved.
Chapter 7 and chapter 13 bankruptcy
A Chapter 7 bankruptcy (liquidation) does not preclude a mortgagor (borrower) from purchasing a house with a HECM if at least two years have passed since the discharge of the bankruptcy.During this period, the mortgagor must have either: re-established solid credit or decided not to incur additional credit commitments.
- An elapsed period of less than two years, but not less than twelve months, may be acceptable if the mortgagor: - can demonstrate that the bankruptcy was caused by extenuating circumstances beyond his/her control; and - has since demonstrated a documented ability to manage his/her financial affairs responsibly.
A Chapter 13 bankruptcy does not preclude a mortgagee from purchasing a home with a HECM if 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 the bankruptcy court to enter into the transaction. SOURCE: HECM Financial Assessment and Property Charge Guide
What is considered satisfactory credit for a Home Equity Conversion Mortgage (HECM) borrower?
If and only if the following criteria are fulfilled, the mortgagee (lender) may consider the borrower to have excellent credit:
The borrower has made all housing and installment debt payments on time in the last 12 months, with no more than two 30-day late mortgage or installment payments in the previous 24 months; and the borrower has had no significant negative credit on revolving accounts in the previous 12 months.
On revolving accounts, payments made more than 90 days after the due date, or three or more payments made more than 60 days beyond the due date, will be deemed significant negative credit.
If, as stated above, a borrower's credit history does not suggest excellent credit, the borrower's payment history requires additional examination.
When a borrower fails to satisfy the acceptable credit standard, the mortgagee must examine the borrower's past-due accounts to establish if the late payments were the result of a dislike for financial obligations, an inability to manage debt, or mitigating circumstances.
The mortgagee must record this analysis in the mortgage file.
Any explanation or proof given for past-due accounts must be consistent with the rest of the data in the file.
If the borrower has not shown a willingness to meet his or her financial obligations as outlined above and no mitigating circumstances can be proved, the mortgagee must demand 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 insufficient, the HECM program requires the lender to put aside an amount sufficient to cover property expenses (i.e. property taxes, homeowner's insurance, and, if needed, flood insurance) throughout the borrower's expected life.
The set aside amounts to a reduction in the borrower's maximum loan amount.
For example, if the maximum loan amount is $100,000 and the sum of property taxes, homeowner's insurance, and other required expenditures exceed $60,000 over the borrower's projected life expectancy, the available loan balance is reduced to $40,000.
As previously noted, the HECM loan does not require borrowers to have a debt-to-income ratio, but does require borrowers to have enough income to cover their monthly expenditures. The term "residual analysis" refers to the process of determining debt to income.
The residual analysis is comparable to the method used by the Veteran's Administration to determine the income-to-debt ratio of veteran loan borrowers.
After monthly expenses, applicants should earn more than the following income guidelines:
Residual Income by Region
4 or more
CT, MA, ME, NH, NJ, NY, PA, RI, VT
IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI
AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK, PR, SC, TN, TX, VA, VI, WV
AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY
Lenders are allowed to tweak income and debt in a fair manner.
For instance, if the monthly income from a reverse mortgage might be utilized to supplement the required residual income.
Frequently Asked HECM Loan Questions
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.