As part of HUD’s 2015 rollout of Financial Assessment, every lender must now examine every applicant’s credit history and property charge history as well as their residual income. This is done to determine whether the reverse mortgage is a sustainable solution for the borrower. Please note that the lender is not looking at a FICO score; actual credit scores are not relevant to the underwriting decision.
Also known as “The WILLINGNESS Test” the lender’s underwriter will review an applicant’s credit report and property charge history records.
What is satisfactory CREDIT history?
Housing and installment debt payments are considered satisfactory if all payments were paid on time in previous 12 months with no more than two 30-day late payments in the previous 24 months.
Revolving account debt payments are considered satisfactory so long as there have been no major derogatory accounts in previous 12 months.
Note: Major derogatory credit is defined as payments made more than 90 Days after the due date, or three or more payments more than 60 Days after the due date.
What is satisfactory PROPERTY CHARGE history?
Satisfactory property charge history will show that all property taxes for all owned real estate are current with no property tax arrearages in prior 24 months.
In addition, all HOA, condominium, or PUD fees are current with no arrearages in the prior 24 months.
Note: If the borrower did not have homeowners and flood insurance (if applicable), borrowers must obtain coverage and prepay for 12 months at loan closing.
Unless the borrower can document extenuating circumstances that meet HUD’s guidelines, a failure of one of these tests (credit history or property charge history) will result in a fully-funded Life Expectancy Set-aside (LESA) to pay for critical property charges.
One difficult challenge for any reverse mortgage professional is getting a homeowner qualified after they’ve missed a mortgage payment or a property charge payment. If a homeowner falls short of HUD’s definition of “satisfactory credit” we’ll often need to set-aside enough principal to pay property taxes and homeowner insurance for that borrower over their expected lifetime.
For this reason, it is imperative that borrower’s seek assistance from a reverse mortgage professional before their credit history is damaged.
A common concern is whether a homeowner may obtain a HECM if they have a Chapter 7 or Chapter 13 bankruptcy on their record. The answer will depend on the type of HECM transaction.
HECM Refinance with a bankruptcy record
For a refinance, a bankruptcy alone does not disqualify a homeowner for a HECM. The underwriter will look at when a Chapter 7 was discharged and the payment history on a Chapter 13 bankruptcy.
HECM Purchase with a bankruptcy record
Bankruptcy is a bigger issue for a HECM for Purchase transaction. A Chapter 7 bankruptcy may require at least two years to have elapsed since the date of the bankruptcy discharge. If there were acceptable extenuating circumstances beyond the homeowner’s control, then less than two years, but not less than 12 months, may be acceptable.
A Chapter 13 bankruptcy will generally need to show that at least 12 months of the pay-out period under the bankruptcy has elapsed.
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