Reverse Mortgages have gotten tougher to qualify for over the past several years. They used to primarily be an entitlement based on the youngest borrower’s age and the value of the home. Due to additional strict guidelines, they are no longer an entitlement but rather a privilege. This means you need to plan in order to be eligible instead of using a reverse mortgage as a last resort only to potentially find out you are not eligible.
There are two key secondary qualifying elements that have pushed many homeowners out of the reverse mortgage market. The first one is residual income and the second one is credit rating. Residual income is comprised of your family size, a utility factor applied based on the gross square foot living space of your home, and your monthly debt payments subtracted from your income. Most people qualify for a reverse with their Social Security income. However, many people don’t take into account any planning and they run their debt up and end up failing the residual income test. It doesn’t matter how much equity you have in your home. If you don’t pass the residual income test, you will not get approved for the loan.
The second element, your credit rating, is now more of a prominent factor as well for a Reverse Mortgage. If you have a low credit score and a lot of recent credit delinquency, you may find that you are not eligible or can only obtain a restricted loan approval. If you haven’t paid your county real estate taxes and homeowners' insurance on time this can also interfere with your loan eligibility. A restricted approval is one where you are required to have a life expectancy set aside (LESA). This is often a very unattractive and stressful scenario that most people will want to avoid.
The complexity of the programs and all the newer qualifying requirements can be partially mitigated by acting a little sooner with a basic plan. If you have good credit and a higher credit score certain loan options will allow you to bypass the residual income test in its entirety. This will allow you to be eligible for a Reverse Mortgage where otherwise it may not be an option for you with a lower or middle of the road credit score and credit profile. The best strategy, regardless of your needs involving a Reverse Mortgage, is to strike when your credit is good and your credit score is high for the highest probability of success in qualifying.
George H. Omilan
President-CEO - NMLS# 873983
Jefferson Mortgage Group LLC - Mortgage Specialists
Programs: Traditional QM (Fannie Mae, Freddie Mac), government insured HECM Reverse Mortgages, and Non Traditional Non-QM Mortgages commonly referred to as Specialized Forward Mortgages including “Alt-A Investor loans” and DSCR (Debt Service Coverage Ratio) loans up to 85% LTV, both Full doc and No Income-No Employment (No Doc) for the investor community. Our expanded niche products also focus on the more traditional FHA & VA with Lower Score and higher Debt-to-Income Options, Fixed & Variable Jumbo loans, and Private Label Reverse mortgages for higher priced homes. We are also highly focused on specialized loans for the Self-Employed borrowers with our Bank Statement & Asset Dissipation Programs. We are committed to offering a full range of “Non-QM Loans” for expanded qualification, where the banks and large-scale lenders dare to go.