Can I Get a Reverse Mortgage with Bad Credit?
By: Courtney Jorstad
February 15, 2023 • 6 minute read
When you apply for a traditional mortgage, having a good credit score is very important. Not only does it affect your ability to get approved for a mortgage, but it also affects the interest rate you will receive.
While the lender will also look at other factors such as your debt-to income ratio and your overall financial history, the lower the credit score, the higher the interest rate because the bank sees you as a riskier borrower.
But what about a reverse mortgage? What role does a credit score play in getting approved for a reverse mortgage? And can you get a reverse mortgage with bad credit?
In this article, we will go over everything you need to know about what factors reverse mortgage lenders will consider when you apply for a reverse mortgage, including your credit score.
What is a Reverse Mortgage?
There are three types of reverse mortgages, but the most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). A HECM reverse mortgage is a federally backed loan program that is only available to homeowners who are 62 years of age or older with significant equity in their home.
A reverse mortgage loan allows homeowners to convert their equity into cash. There are three different ways that reverse mortgage borrowers can choose to receive their funds. Reverse mortgage borrowers can receive that cash as a lump sum, monthly payments, a line of credit, or any combination of the three.
The reverse mortgage will also replace and pay off the current traditional mortgage, if there still is one. This also eliminates the monthly mortgage payments.
One of the ways that a reverse mortgage is different from a traditional mortgage is that it is not paid off with monthly payments. While older homeowners could also use a home equity loan or home equity line of credit (HELOC) to tap into their equity, those too have to be paid off with monthly payments.
A reverse mortgage is not paid off until the homeowners decide to sell the home, they no longer live in the home full-time, or when the last living borrower passes away, in which the home is typically sold.
The Federal Housing Administration (FHA) puts a limit on how much borrowers can receive each year. As of 2023, the maximum loan amount is $1,089,300. If the home’s value is worth more than that, most major lenders offer a proprietary reverse mortgage option that allows homeowners to borrow significantly more. Some lenders offer jumbo loans for as much as $4 million.
How Do You Qualify for a Reverse Mortgage?
While a reverse mortgage is a loan just like a traditional mortgage, the qualifications and loan terms are very different. In order to qualify for a reverse mortgage, you must meet the following criteria:
- At least one of the borrowers must be 62 or older.
- The home must have significant equity; typically, a minimum of 50%.
- The home must be the primary residence of the borrowers.
- The home must be a single-family home, a two-to-four-unit property in which the homeowners occupy at least one of the units, a townhome, a condominium, or manufactured home that was built after June 1976.
- You must be able to continue to pay for the property taxes, homeowners insurance premiums, and any required fees such as HOA fees.
- The home must be in good condition.
- You cannot have any federal debt. This includes things like back taxes or student loans.
- Potential borrowers must complete a counseling session with a third-party HUD-approved counselor before submitting their application.
What is the Minimum Credit Score for a Reverse Mortgage?
There is no minimum credit score for getting approved for a reverse mortgage. But lenders will consider it along with other factors as they look at the overall financial health of the applicants.
Even though there are no minimum credit score requirements for a reverse mortgage, does this mean you can get approved for a reverse mortgage with bad credit?
Can You Get a Reverse Mortgage with Bad Credit?
While credit scores and credit history may not have the impact they do when applying for a regular mortgage, they do play a role in getting approved for a reverse mortgage.
Lenders will pull your credit report as part of their financial assessment. What lenders will primarily be looking at is if you are able to continue to pay the property taxes, the homeowners insurance, any required fees, and maintenance fees to keep the home in good condition. To assess this, they will be checking to see if bills are paid on time or if there’s a history of late payments.
Credit scores and credit history play a role in conveying this information. That being said, if you are able to demonstrate that you can meet the reverse mortgage requirements even though you have bad credit, you may still get approved.
Credit scores play a major role in getting approved for a traditional mortgage because banks want to be sure that the borrowers are going to be able to make their mortgage payments each month.
The good news is that FICO credit scores tend to increase with age, according to Experian. Credit scores tend to take the biggest leap from age 50 to age 59. The average credit score in all age groups that are 50 or older is 700 or more.
Credit scores are labeled Excellent to Poor depending on the range it falls in:
- Excellent: 720 or greater
- Good: 690 to 719
- Fair: 640 to 689
- Poor: 629 or lower
If you do get approved for a reverse mortgage with bad credit, the funds from a reverse mortgage could be used to improve your credit by helping you to have more money to meet your monthly bills and by helping you to pay off credit cards, medical bills, and other consumer debt.
Factors that Would Impact Your Eligibility for a Reverse Mortgage
Here are some factors that may affect your ability to qualify for a reverse mortgage:
- Age. The homeowners will need to be 62 or older in order to qualify.
- Property. They may also be denied if the property is not the principal residence of the homeowners, the home is not in good condition, and/or it does not meet the eligibility requirements of the U.S. Department of Housing and Urban Development (HUD).
- Financial. If a lender thinks that homeowners will not be able to pay the property taxes, the homeowners insurance, or maintain the home, they will likely be denied.
- Federal Debt. They may also be denied if they owe any federal debt or they are behind on their payments.
- Current mortgage. If the reverse mortgage will not be enough to pay off the existing mortgage, this is another reason why applicants may be denied.
How Does a Reverse Mortgage Affect Your Credit Score?
Some people think that a reverse mortgage may negatively affect their credit score. A reverse mortgage does not directly impact credit scores. In fact, if you are able to use your reverse mortgage funds to pay off credit card debt and pay your bills on time, it may help improve your credit score.
The Bottom Line
If you are interested in taking out a reverse mortgage and you are concerned that your credit score may affect your ability to get approved, it is a good idea to talk to a reverse mortgage loan officer who will be able to assess your specific situation.
To get the process started, check out our list of recommended reverse mortgage lenders.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.