If there’s one number American consumer’s doggedly pursue it is their credit score- the magic number that determines one’s ability to incur debt and at what cost.
Traditional mortgage borrowers know that their credit score is pivotal in determining what interest rate they will pay on their home mortgage. Recently, however, some have suggested a minimum credit score for reverse mortgage applicants in the effort to reduce the likelihood of technical defaults due to non-payment of property taxes or homeowner’s insurance. Would minimum credit scores help protect the Home Equity Conversion Mortage and FHA’s MMI fund which backs the loan?
Older Americans face some unique challenges when it comes to obtaining an ‘ideal’ credit score. While those over the age of 60 have an average FICO score of 743, the highest among all age groups, debt-free seniors may find themselves with a considerably lower score- if one at all. According to an article in CreditCards.com FICO states that a consumer’s credit score must have three things in order to produce a credit score.
3 Requirements for a Credit Score:
- A credit account at least six months old
- An account that has been updated by a lender or creditor in the last six months
- No death notice on file
Older adults with a paid-off mortgage and no credit card debt could find themselves with a lower credit score. All which brings us to the question- how helpful are credit scores in determining the risk of a HECM borrower defaulting on their obligations? The answer is little if any.
While not being an ardent supporter of the Financial Assessment, it at least measures a prospective HECM borrower’s financial capacity to meet their ongoing property charges in the short term. Something a mere credit score is ill-equipped to do. Under the Assessment’s guidelines, the applicant’s willingness to pay is measured not by their credit score but by their credit history. In addition, access to cash from retirement and savings accounts are taken into consideration as ‘imputed income’ being a potential source of emergency funds should the homeowner find themselves unable to pay property charges from their liquid cash assets.
Requiring a minimum credit scoring to reduce HECM losses is akin to battling the smoke instead of the fire from which it comes. Until the HECM risks inherent in varying home appreciation rates in different regions and the widespread illegitimate occupancy by renters and heirs after the borrowers have left the property are addressed, losses in future cohorts of endorsements will not be significantly diminished.
Credit scores are a convenient measure of consumer borrower’s risk in traditional lending but do little to measure risk or improve the financial viability of the HECM program.