Due to its unique structure, a reverse mortgage can be obtained without any examination of the borrower’s creditworthiness. Instead, lenders will focus on the quality of the home, which serves as collateral for the loan. However, there is evidence that this could soon change, and that lenders could begin conducting credit checks for prospective borrowers.

In fact, it is already the case that proprietary reverse mortgage loans require borrowers to have strong credit. That’s not because proprietary loans are structured differently from FHA-insured Home Equity Conversion Mortgages (HECM), the product of choice for 95% of reverse mortgage borrowers. Instead, lenders merely need confirmation that borrowers have the means to pay property taxes, hazard insurance premiums, and maintain their properties, thereby mitigating any possibility of default.

With HECM reverse mortgages, this is not of primary concern to lenders. To be sure, default/foreclosure is always unfortunate, and it is an undesirable outcome for all parties involved. However, the fact that HECM loans are insured by the FHA means that lenders don’t need to worry about what would happen in the event of default, since any losses will be defrayed by the FHA. With proprietary loans, in contrast, all losses are absorbed directly by lenders, or by investors in reverse mortgage backed securities.

Given that default is inherently undesirable, the reverse mortgage industry is currently brainstorming solutions designed to prevent it from happening. One proposal is that when the reverse mortgage is originated, an escrow account will be created, so that property taxes and hazard insurance premiums can be paid automatically. In fact, escrow accounts are required for many conventional mortgages, and it’s unclear why they were never deemed necessary for reverse mortgages. Another proposal would mirror the steps taken by proprietary lenders. By performing a simple credit check, lenders can quickly screen potential borrowers and reject those that are most likely to default.

This is important if reverse mortgages are to continue their push into the mainstream. With even lower rates of default, reverse mortgages will become even more attractive to investors and better candidates for securitization. That should lead to the lowering of reverse mortgage interest rates and generally more attractive terms for borrowers. One day, proprietary reverse mortgages might even hope to rival HECM reverse mortgages in popularity.

For now, most borrowers can rest assured that their credit history – whether strong or weak – is not a factor in their reverse mortgage application. As for whether this will be the case in the future, well, we will have to wait and see.

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