Interested in a reverse mortgage but have bad credit? Read below to understand your options.
Many homeowners struggle with finding the “right way” to finance their homes and choosing the right non QM lenders. Loans, mortgages, lines of credit, and other financing options can be especially difficult to navigate for individuals who have lower credit scores or less consistent credit histories.
For senior homeowners, in particular, applying for a reverse mortgage has become a popular financing solution. However, similar to other loan options, those with poor credit may have questions about entering into a reverse mortgage contract, including:
- Can you get a reverse mortgage with bad credit?
- What kind of credit score do you need to get a reverse mortgage?
- What are the alternatives to a reverse mortgage?
In this article, we’ll answer these questions, and more, to determine whether a reverse mortgage is right for you based on your specific financial situation.
What Is a Reverse Mortgage?
A reverse mortgage is a loan designed for homeowners at least 62-years-old or older that essentially does the opposite of a traditional mortgage loan. With a traditional mortgage or your existing mortgage, the homeowner is given a loan to buy a house. Over time, the homeowner pays back this loan in full, plus interest, typically in the form of monthly payments. With a reverse mortgage, the borrower or homeowner borrows money against the equity of their home, which earns them cash payments based on their home’s value.
Additionally, an often misunderstood reverse mortgage fact is that, unlike a traditional mortgage, a reverse mortgage doesn’t require the homeowner or borrower to make any monthly loan payments. Instead, a reverse mortgage loan is repaid after the homeowner moves residences or passes away.
The amount of money loaned in a reverse mortgage is mainly determined by two factors:
- The equity of the home – So, how much equity do you need for a reverse mortgage? The equity of your home is the difference between your home’s market value and the outstanding balance of all payments on the house and ultimately determines how much money you can be loaned. The higher your equity, the higher the loan. However, as you’re loaned this money, the equity in your home decreases. Your home also becomes collateral for your loan.
- The age of the homeowner – The age of the homeowner will also impact the amount of money loaned. The older the homeowner is, the greater their loan will be.
Can You Qualify for a Reverse Mortgage with Bad Credit?
If you’re at least 62-years-old and interested in a reverse mortgage, you may be wondering:
Can I get a reverse mortgage with bad credit?
Although the short answer is yes, the longer answer is maybe. Generally speaking, it is possible to qualify for a reverse mortgage with bad credit. However, it depends on your specific financial situation. In particular, a reverse mortgage lender will explore the cause of your bad credit when determining your reverse mortgage eligibility.
This is because individuals with bad credit are more likely to:
- Have outstanding debts
- Owe money on their original or existing mortgage
- Default on tax, a loan program, or credit
Any of these factors have the potential to make a homeowner ineligible for a reverse mortgage.
What Do Lenders Look for Regarding Reverse Mortgage Eligibility?
When you apply for a reverse mortgage with a lender, they’ll analyze your income sources, debts, and credit history.
This includes analyzing your:
- Social security
- 401(k) plan
- Federal income taxes
- Federal student loans
If a lender finds that you’re delinquent on any federal debts, meaning you’re late or overdue on making payments, you’ll likely not be eligible for the reverse mortgage. However, the lender may still allow it if the funds from the reverse mortgage are enough to be used to pay off your debts.
If a lender sees in your credit history that you’ve defaulted on your debts, meaning you haven’t made payments, your application will likely be rejected. In some cases, a lender may determine that your defaults are not severe enough to reject your application. If this happens, you may be required to set aside money from the reverse mortgage to pay your home’s property costs, taxes, and mortgage insurance later on.
This money is kept in an account called a Life Expectancy Set Aside (LESA) that your lender has access to. If you default on any of these payments in the future, the lender can take money out of the LESA to pay them.
What Credit Score Do You Need to Get a Reverse Mortgage?
Fortunately, there is no minimum credit score required to be eligible for a reverse mortgage. As long as you have adequate income to cover future property charges, are not delinquent on federal debts, and meet other minimum requirements, you could qualify for a reverse mortgage even with a very poor credit score.
What Else is Required to Receive a Reverse Mortgage?
The most prominent requirement to be granted a reverse mortgage is age. Reverse mortgages are only available to individuals who are 62-years-old or older.
Further, in order for the home’s equity to be great enough to justify a loan, it’s required that the original mortgage be paid off or nearly paid off. If you still have a mortgage loan balance before closing on your reverse mortgage loan, you must have the funds to pay off your loan balance at the time of closing. You can either use your own existing funds or the loan proceeds that you earn from the reverse mortgage.
What Are the Benefits of a Reverse Mortgage?
Reverse mortgages were developed specifically to assist senior homeowners. Some of the most significant benefits seniors can experience include:
- Turning equity into usable income – Home equity is not a usable source of wealth unless the homeowner takes action. There are two ways a homeowner can make income from home equity: borrow against the equity, or sell the home for a profit. A reverse mortgage is a common way to use home equity.
- Receiving a stable source of income – Retirees and elderly individuals who don’t have a steady place of employment are less likely to have a consistent stream of income. This can lead many to feel uneasy, as they’re forced to live off their savings without a safety net to fall back on. A reverse mortgage loan can provide a stable source of income in the form of a monthly check or a lump sum payment.
- Investing with less risk – Other investment options, such as buying stocks, come with a guarantee of risk. In some cases, the money that you make in stocks can be lost just as quickly. A reverse mortgage provides a less risky investment option. As long as the homeowner continues living in their home, a reverse mortgage is an almost guaranteed source of cash.
What Are the Alternatives to a Reverse Mortgage?
If you don’t qualify for a reverse mortgage due to your financial situation or age, or if you don’t want to be forced to put money aside in a LESA account, there are other solutions available that may better suit your needs.
- Home equity loans
- Refinancing options
Home Equity Loans
Home equity loans are similar to reverse mortgage loans in that they’re based on the home’s equity. However, unlike reverse mortgages, these loans aren’t age-restricted. This means that homeowners who are too young for a reverse mortgage may be better suited for this option as long as they meet the loan’s credit and income requirements.
For those with poor credit, or those who don’t want to bear the burden of monthly payments, a home equity loan may not be the ideal solution.
If you need help getting HELOC with bad credit, a sale-leaseback program can help you boost your chances of getting a HELOC loan with a low credit score.
Sale-leaseback plans are a lesser-known option for accessing your home’s equity. Instead of taking out a loan or borrowing against the equity, sale-leasebacks choose another route for converting equity into income—selling your house for a profit.
In a sale-leaseback, you sell your home to a buyer who then leases the home back to you. This unique approach allows you to remain in your home even after it’s been sold and take advantage of the profits you made without the stress of having to immediately move out.
Sale-leasebacks often have fewer restrictions and fees than loans or reverse mortgages because there are no monthly payments involved other than monthly market rent. This option may be particularly appealing to homeowners looking to move residences, but want the freedom and flexibility to do so on their own time.
Refinancing your mortgage is a process that can lower your monthly payments and relieve month-to-month financial burdens. Essentially, your payment timeline and terms are updated to better reflect your current income and expenses.
However, it’s important to keep in mind that refinancing your mortgage may negatively impact your retirement plans, as taking on a longer-term mortgage later in life can delay your ability to retire.
For some homeowners, selling their current home and moving into a house at a lower price point may be a viable last resort. Although this may seem like a more extreme option, it may be worthwhile in the long run as it can help reduce overall living expenses for homeowners in more difficult financial situations.
Find Your Ideal Financing Solution
Depending on your individual financial circumstances, a reverse mortgage may or may not be the right choice for you. Although reverse mortgages are less restrictive when it comes to maintaining a minimum credit score, they nevertheless require hoops to jump through regarding debt, credit history, and income. Luckily, a sale-leaseback program can provide solutions for individuals no matter their financial situation.
Interested in a reverse mortgage but have bad credit? Many homeowners struggle with finding the “right way” to finance their homes and choosing the right non QM lenders. Loans, mortgages, lines of credit, and other financing options can be especially difficult to navigate for individuals who have lower credit scores or less consistent credit histories. If you are still unsure of alternative options to finance your home, after reading this article, consult a financial advisor to discuss your options.
- Investopedia. Reverse Mortgage.
- National Reverse Mortgage Lenders Association. Application/Fees/Disclosures.
- Consumer Financial Protection Bureau. Can anyone take out a reverse mortgage loan?
- Experian. Is a Reverse Mortgage Right for You?