Reverse Mortgages and Credit Scores: What Borrowers Should Know

a woman discussing credit and reverse mortgages|A senior woman inquiring about credit ratings and reverse mortgages

A good credit score isn’t crucial to secure a reverse mortgage, and a bad credit score won’t necessarily disqualify you. However, that doesn’t mean a lender will completely dismiss your credit score either. Here’s what potential borrowers will want to know about credit scores and getting a reverse mortgage

How Your Credit History Impacts Your Reverse Mortgage Application 

When you apply for a reverse mortgage, the lender will want to make sure you can maintain the home and pay your property taxes, insurance premiums, and homeowner association (HOA) fees, if applicable. As part of assessing a borrower’s ability to meet the financial obligations of the loan, they will pull a credit report and review your credit history. They may also probe any delinquencies in your credit history and investigate whether there are extenuating circumstances for late payments or overdue accounts.  

Other factors, like a borrower’s age, home equity, and current interest rates, are more important to determine eligibility for a reverse mortgage. The lender may also look at your sources of income, like a pension, Social Security income, and investments. 

Before you apply for a reverse mortgage, it may be a good idea to pull your credit report to check its accuracy. The credit report will also help you identify areas a lender would view as problematic. 

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What Are Lenders Looking For? 

Though a poor credit score isn’t likely to make you ineligible for a reverse mortgage, there are specific parts of your payment history that a lender will examine closely, namely those related to your property over the previous 24 months. 

If you have a history of late payments, a lender may ask you to take additional measures to ensure you have the funds for property-related expenses. You may be required to set up a Life Expectancy Set-Aside (LESA). This is an account funded by loan proceeds and earmarked to cover property taxes, HOA fees, and insurance costs.  

The money is set aside to ensure the borrower can pay these future costs. The amount deposited will depend on your monthly property tax, insurance costs, and the estimated life expectancy of the youngest borrower. In cases where a borrower may outlive their projected life expectancy, the borrower will be responsible for making payment arrangements for property-related expenses. 

How Taking Out a Reverse Mortgage Impacts Your Credit Score 

Securing a reverse mortgage will not impact your credit. Since you’re not required to make payments to the lender, it is unlikely a reverse mortgage will even appear on your credit report. One overlooked benefit of a reverse mortgage is its potential to help borrowers pay off high-interest or long-standing debt that has negatively affected their credit score. While the reverse mortgage won’t be directly responsible for improving your credit rating, it could be useful for helping you do so.