Getting older comes with its fair share of financial complexities. Your fixed income may no longer cover all your expenses. The house you’ve lived in for decades needs a new roof. Your kids may even be asking you to help with college tuition.
As the bills pile up, you may find yourself wondering: Could a reverse mortgage provide some needed cash and financial breathing room? And if you go that route, what impact will it have on your credit?
Quick Answer 👇
A reverse mortgage typically does not impact your credit score because it’s a loan based on home equity, not creditworthiness.
Let’s break down how reverse mortgages work, what shows up on your credit report, and the potential credit impacts to help you make an informed decision.
What Is a Reverse Mortgage and How Does It Work?
A reverse mortgage allows homeowners aged 62 and up to convert part of their home’s equity into cash. You retain ownership of your house, while the loan accrues interest over time.
Unlike a traditional mortgage, there are no monthly payments required with a reverse mortgage. The loan becomes due when you pass away, sell the home, or move out permanently.
Sounds straightforward enough, right? But before signing on the dotted line, it’s smart to understand the credit implications.
Does a Reverse Mortgage Appear on Your Credit Report?
When you take out a reverse mortgage, the account will appear on your credit report just like any other mortgage loan.
Lenders are required to report details of the loan to the three major credit bureaus – Equifax, Experian, and TransUnion. It will show up as a mortgage account with the amount borrowed and loan terms.
Don’t panic if you see a steep increase in your mortgage balance. With a reverse mortgage, the loan balance grows over time as interest accrues on the initial principal. This rising loan amount will be reflected on your report.
How Does a Reverse Mortgage Affect Your Credit Score?
Because a reverse mortgage is reported like any other mortgage loan, many borrowers worry it may drag down their credit score.
But getting a reverse mortgage does not directly hurt or help your credit score. It simply shows up as an additional account on your credit report.
There are a few indirect impacts to be aware of, however:
Closing Your Old Mortgage Account
If you had an existing mortgage, you’ll need to pay it off and close that account to get the reverse mortgage.
Eliminating your prior mortgage lowers your overall credit utilization ratio, which can boost your score. But it also decreases your mix of credit by removing an installment loan from your profile. This may ding your score a bit.
For most borrowers, the impact evens out to a minimal effect either way. Those with short credit history may notice a larger shift.
Falling Behind on Taxes and Home Insurance
With a reverse mortgage, you are still required to pay property taxes, homeowners insurance, and any HOA fees. Failing to make these payments damages your credit, just like missing mortgage payments would.
Rising Loan Balance
As interest accrues, your reverse mortgage balance grows. If it gets too high relative to the value of your home, the lender may force you to repay the loan. This could hurt your credit if you are unable to pay it off.
Credit Impact When Loan Comes Due
When the reverse mortgage matures — either at your death or when you sell or move out — your credit is no longer affected. But any unpaid loan balance must be repaid by your estate or the sale of the home.
If you sell the home yourself, repaying the reverse mortgage shows up on your credit report but does not negatively impact your score. Think of it like paying off a traditional mortgage.
Maintain Your Credit Even with a Reverse Mortgage
While a reverse mortgage does not damage your credit directly, protecting your credit standing remains important:
- Make sure property taxes and insurance are paid on time to avoid defaults.
- Review account statements to stay aware of your rising loan balance.
- Consider making voluntary repayments if your balance is growing faster than expected. This protects home equity for you and your heirs.
- Avoid taking on additional high-interest debt that inflates your credit utilization.
With some diligence, you can reap the benefits of extra cash flow from a reverse mortgage without allowing it to hurt your credit.
As with any complex financial move in later life, be sure to involve trusted family and a HUD-approved reverse mortgage counselor. Their insight helps ensure you make the best choices for your unique situation.
While aging brings its difficulties, taking the right steps allows you to access your home equity while protecting your credit and that of your loved ones. With a few precautions, a reverse mortgage can provide financial flexibility without derailing your established credit standing.
Frequently Asked Questions
Q: Does a reverse mortgage show on a credit report?
A: No, a reverse mortgage doesn’t appear on credit reports since it’s not a traditional loan; it’s a home equity conversion.
Q: What is the downside to a reverse mortgage?
A: Downsides include reduced inheritable home equity, potential high costs, and the requirement to maintain the property.
Q: Can creditors go after a reverse mortgage?
A: Creditors can’t access reverse mortgage proceeds; they’re protected from most debts.
Q: Who keeps the equity in a reverse mortgage?
A: The homeowner retains home equity; it’s used to repay the reverse mortgage when it matures.
Q: What happens when someone dies with a reverse mortgage?
A: The heirs can choose to sell the home, pay off the loan, or refinance. The lender doesn’t automatically own the house.
Q: Is it hard to sell a house with a reverse mortgage?
A: Selling is possible; the sale proceeds pay off the reverse mortgage balance, and any remaining equity goes to the homeowner or heirs.
Q: How long can you stay in your home with a reverse mortgage?
A: You can stay as long as you live in the home, maintain it, and meet loan obligations.
Q: What are the 3 types of reverse mortgages?
A: The three main types are Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages.
Q: Can a person outlive a reverse mortgage?
A: No, a reverse mortgage is designed to last as long as the homeowner lives in the home, regardless of how long that may be.
Q: How much money do you get from a reverse mortgage?
A: The amount varies based on factors like age, home value, and interest rates. Generally, older borrowers with more valuable homes receive more.
