Key Takeaways
- There is no minimum FICO credit score required for a reverse mortgage.
- However, lenders perform a Financial Assessment to check your history of paying bills.
- Bad credit may require a Life Expectancy Set-Aside (LESA) to pay future property taxes.
\n\nIf you want to buy a house with a traditional mortgage, a low credit score will either cause your application to be instantly denied or force you to pay astronomical interest rates.
Reverse mortgages operate under an entirely different set of rules. The short answer is: Yes, you can absolutely get a reverse mortgage with bad credit.
No Minimum FICO Score
The Federal Housing Administration (FHA) does not mandate a minimum FICO credit score for a Home Equity Conversion Mortgage (HECM).
Whether your credit score is 800 or 500, it does not dictate your approval, nor does it change your interest rate. The interest rate on a reverse mortgage is determined by the broader financial markets and the lender's margin, not your personal creditworthiness.
The Financial Assessment (The Catch)
While there is no minimum score, lenders do not just ignore your credit history. In 2015, HUD implemented the Financial Assessment.
The lender will pull your credit report to look for one specific pattern: Do you have a history of paying your property taxes and homeowners insurance on time?
Because the lender's biggest fear is that you will default on your property taxes (causing a county tax lien), they use your credit report as a behavioral indicator. If you have late payments on credit cards, medical bills in collections, or a recent bankruptcy, the underwriter will flag your file as "high risk" for a future property tax default.
The Solution: The LESA
If you fail the Financial Assessment due to bad credit, your loan is not necessarily denied. Instead, the lender will approve the loan but attach a condition: you must have a Life Expectancy Set-Aside (LESA).
As discussed in previous articles, a LESA is a mandated escrow account. The lender takes a portion of your available reverse mortgage funds and locks it away. They then use those locked funds to pay your property taxes and insurance for you.
Because the lender is now in complete control of paying the taxes, your bad credit is no longer a risk factor.
In summary, bad credit will not stop you from getting a reverse mortgage, but it will likely force you into a LESA, which significantly reduces the amount of cash you can put in your pocket at closing.\n