How a Reverse Mortgage May Affect Your Credit Score

Many homeowners worry a reverse mortgage will hurt their credit score. While the loan itself doesn't directly impact your score, failing to meet its terms can trigger a negative chain reaction.

1. Meeting Loan Obligations: The borrower must continue to pay for property taxes, homeowner's insurance, and general home maintenance. These responsibilities are a core condition of the reverse mortgage agreement.
2. Advancing of Funds: If the borrower fails to cover these essential costs, the loan servicer may step in and pay them to protect their interest in the property. This amount is then added to the loan balance.
3. Entering Default: Failure to reimburse the servicer for these advanced funds can cause the loan to go into default. Once in default, the lender has the right to call the entire loan balance due immediately.
4. Foreclosure and Credit Damage: If the borrower cannot repay the loan, the lender can initiate foreclosure proceedings. A foreclosure is a major negative event that gets reported to credit bureaus, which will severely damage a credit score.

How Much Will a Reverse Mortgage Affect Your Credit Score?

While a reverse mortgage doesn't impact your credit score in the same way a traditional loan does, certain factors can influence your credit standing. Here are a few key points to consider.

• Property expense payments. You must continue paying property taxes and homeowners insurance. Failing to meet these obligations can lead to a loan default, which will negatively affect your credit history.
• Initial credit check. Lenders perform a financial assessment that includes a credit check during the application process. This results in a hard inquiry, which can temporarily lower your score by a few points.
• Credit report listing. The loan appears on your credit report, but it doesn't have a monthly payment affecting your debt-to-income ratio. The balance will increase over time as interest and fees are added.

How You Can Avoid a Reverse Mortgage Affecting Your Credit Score

Make Timely Payments

The most direct way a reverse mortgage can impact your credit is through missed payments. Ensure you pay your property taxes and homeowner’s insurance on time. Lenders may report defaults on these obligations to credit bureaus, which can negatively affect your credit score.

Maintain Your Property

Your loan agreement requires you to maintain your home. Neglecting necessary repairs can lead to a loan default. A default could result in foreclosure proceedings, a significant event that would be reported to credit agencies and severely damage your credit history.

Understand Your Obligations

Before closing, thoroughly review your loan terms with a counselor. Understanding all your responsibilities, including non-loan-related payments and property upkeep, helps you avoid unintentional defaults that could be reported to credit bureaus and harm your score.

Ways to Improve Your Credit Score

Improving your credit score is an achievable goal that requires consistent, positive financial habits. While it takes time, there are several proven methods you can use to boost your creditworthiness and build a healthier financial profile.

• Monitor your credit reports. Regularly check your reports from Experian, TransUnion, and Equifax to identify and dispute inaccuracies that could be hurting your score.
• Set up automatic bill payments. Your payment history is a crucial component of your score, so automating payments ensures you never miss a due date.
• Reduce your credit utilization ratio. Aim to keep your credit card balances below 30% of your total available credit to show lenders you aren't over-reliant on debt.
• Become an authorized user. Being added to a credit card account with a long history of on-time payments and low utilization can give your score a boost.
• Diversify your credit mix. Lenders like to see that you can responsibly manage different types of credit, such as installment loans and revolving credit accounts.
• Limit hard inquiries. Avoid applying for too much new credit at once, as each application can temporarily lower your score.

The Bottom Line

A reverse mortgage typically won't impact your credit score as monthly payments aren't reported. However, failing to pay property taxes or insurance can lead to default and negatively affect your credit.

Frequently Asked Questions

Does applying for a reverse mortgage hurt my credit score?

The application requires a credit check, resulting in a hard inquiry. This may cause a minor, temporary dip in your credit score, similar to other loans.

How do reverse mortgage payments appear on my credit report?

Since reverse mortgages don't require monthly payments, they typically do not appear on your credit report as an active account with a regular payment history.

Can a reverse mortgage help me build or rebuild my credit?

No, a reverse mortgage is not a tool for building credit. The absence of a monthly payment history means it won't positively impact your score.