In general having derogatory credit is less of an issue for being approved on a reverse loan than it would be on traditional financing.
The reverse loan applicant does undergo some “light” credit Underwriting to determine their residual income after all housing obligations are paid and this would also include any revolving or installment debts as well.
The underwriting process is referred to in the industry as the Financial Assessment and was put into place within the last few years, providing an overview of the borrowers financial capacity and willingness to continue making any on going payment obligations after the reverse loan has funded and closed.
FICO scores are not used to determine an individual eligibility for the loan, but if there are any late payments on an existing mortgage and other obligations, a letter of explanation must be provided along with the necessary documentation to support it.
But what if one had had a bankruptcy? Can they still be approved for the loan or not? The short answer is “yes”.
Chapter 7 Bankruptcies must be dismissed or discharged prior to closing the new loan. If it was dismissed over one year ago, no additional documentation is required.
But if it was less than one year, the borrower must provide a court order signed by the judge as proof of the discharge or dismissal along with the discharge schedule.
Chapter 13 Bankruptcies have a couple of options.
The borrower pays the bankruptcy in full at the close of Escrow. And obtain a payoff letter from the trustee.
The borrower must pay off any liens against the property and any federal debt.
The court must provide written permission signed by the judge indicating that the borrower does not need to pay off the bankruptcy to proceed with the reverse mortgage. This permission must specify that the mortgage may be an adjustable rate mortgage, if applicable.
Chapter 11 Bankruptcies are most prominently used by businesses and have similar guidelines as a Chapter 13 Bankruptcy.
This is a brief description about what the lending process is and what must take place in order to approve a reverse loan for a borrower who has had credit problems in the past. But do contact me if you have any questions.
In my previous post I mentioned that since the 1990’s, “Gray” divorce ( As senior divorce is often referred to) has increased. As a matter of fact it has tripled and more seniors are splitting up than in any previous time.
More often than not, the “wife” will want to continue to live in the home but is unable to qualify for a traditional loan due to lack of income and cash reserves.
So what happens if one of them wants to keep the home and continue to live in it?
More than likely they won’t have enough income to qualify for a traditional loan and even if they are going to receive spousal support, a lender will not use it for qualifying purposes because there will be no history of it’s receipt to the spouse who has been awarded support.
And what would be her option?
Depending on her age, the value of the subject property and if there are any mortgages on it, she may be able to qualify for a reverse mortgage, pay off the spouse and continue to live in her home.
Her only responsibilities would be to continue to pay property taxes, home insurance and any HOA fees and keep the home in good repair.
Reverse loans are a financial tool. A tool to leverage the longevity of a retirement portfolio, purchase a home, provide additional income for on going expenses and other aging concerns.
And it’s also an excellent tool that can help the pain of divorce be just a little bit less and allow one of the divorcing couples to remain living in their home and not be displaced.
My description is quite simplistic in this post and the borrower does need to qualify on their residual income, but overall using a Reverse mortgage as part an option to retain the property in a divorce is a very good suggestion and should be considered in the settlement process.