Few topics in real estate law are more convoluted and difficult to understand than the elusive reverse mortgage. There are three types of reverse mortgages: 1) the single purpose reverse mortgage, offered by some state and local government agencies and nonprofit organizations (this option is the most cost-effective but is not available in every state and can only be used for one purpose, specified by the government or nonprofit lender including home repairs, improvement or property taxes); 2) federally-insured reverse mortgages, which are also formally known as Federal Housing Administration (“FHA”) Insured Home Equity Conversion Mortgages (“HECM”) and are backed by the U.S. Department of Housing and Urban Development (“HUD”) and 3) proprietary reverse mortgages, which are private loans that are backed by certain companies whom develop them. For the purposes of this blog post, I will focus predominantly on the federal HECM reverse mortgages.
A reverse mortgage is defined as a financial instrument that allows homeowners aged 62 and older to access the equity in their home, while still retaining title to their property. In addition to the age requirements, the borrowers must live in a 1 to 4 family home as their primary residence, and the property, itself, must have equity in it. HUD-approved condominiums and manufactured homes that meet the FHA requirements are also eligible. Unlike applicants for conventional residential mortgages, traditionally, applicants for reverse mortgages do not need to meet basic income or credit qualifications. Before obtaining a reverse mortgage, applicants need to meet with a counselor from an independent government-approved housing counseling agency, which explains to the Borrowers the different payment options, fees and other costs of the loan. Thus, borrowers of reverse mortgages essentially receive the mortgaged funds and do not have to repay the principal and interest while they occupy the property. The proceeds of a reverse mortgage are generally tax-free, do not have income restrictions and do not affect the Borrower’s Social Security or Medicare benefits. Before 2014, Borrowers did not have to make any payments towards the property. However, because many homeowners have failed to maintain their property tax and home insurance payments, starting in late January 2014, the FHA is requiring lenders to verify that homeowners, including reverse mortgage borrowers, have the ability to pay their taxes and insurance and that their credit history demonstrates a commitment to paying the aforementioned obligations. Thus, instead of Borrowers making monthly mortgage payments towards the loan’s principal and interest, Borrowers only have to make hazard and flood insurance premiums, utilities and real estate tax payments. The public policy behind reverse mortgages is to encourage seniors to be able to stay in their family home or to purchase a new home that is more appropriate for their current lifestyle and financial situation. Seniors can obtain a reverse mortgage even after their financial positions have changed, whether through retirement or a loss in current income. A reverse mortgage allows the Borrowers to eliminate their conventional residential mortgage, if they have one, by paying it off through the new reverse mortgage. A reverse mortgage can also provide Borrowers with supplemental income in the form of a single disbursement lump sum at the Closing/Re-finance, an equal monthly payment, a line of credit inspired plan of various installment payments or a combination of monthly payments and a line of credit. Many Borrowers also use the proceeds from the mortgage to meet unexpected medical expenses and make home improvements. Nevertheless due to these increased requirements, many seniors whom may have qualified for reverse mortgages in the past will now not be able to obtain a reverse mortgage and as a result, may not be able to remain in their homes.
The amount Borrowers can obtain through reverse mortgages vary and depends on various factors including: 1) the age of the youngest borrower; 2) the current market interest rate; 3) the lesser of the appraised value (the amount of equity in the house), the reverse mortgage limit of $625,000.00 and the sales price; and 4) the initial mortgage insurance premium. As a result of the age factor, many spouses choose to not include a younger spouse as a co-borrower on a reverse mortgage and this could have disastrous effects on the younger spouse’s life when and if the Borrower passes away. The Lender has an inherent right to foreclose on the property and the surviving non-borrower spouse has no right to keep living in the property. Hpwever, regulatory changes within federal law may soon afford more protection to non-borrower surviving spouses on reverse mortgages.
So what exactly happens when the Borrowers of a reverse mortgage passes away? In the cases where there is more than one qualified Borrower on title, if one Borrower permanently vacates the property due to death or hospitalization, then the other Borrower(s) can continue to live in the home. Repayment of the reverse mortgage is only required if all of the Borrowers sell the home or vacates the property for more than 365 consecutive days i.e. one full calendar year. When the home is sold or no longer used as a primary residence of any of the Borrowers, the cash, interest and other reverse mortgage finance charges must be repaid. After the mortgage is paid off, the proceeds i.e. the remaining equity in the property beyond the amount owed will go to the decedent’s estate. Most reverse mortgages contain a “non-recourse” clause, which prevents the Borrower or Borrower’s estate from owing more than the fair market value of the property when the loan becomes due. The decedent’s heirs and estate will not inherit any debt from the reverse mortgage. However, issues arise when the heirs or beneficiaries of the estate do not know that the decedent executed a reverse mortgage and do not realize that they will not inherit the mortgaged premises or that they will need to vacate the mortgaged premises. If the heirs or beneficiaries of the estate want to retain ownership of the property, the heirs/beneficiaries must repay the loan in full, even if the amount owed is greater than the fair market value of the property.
It is also worthy to note that unlike conventional mortgages, reverse mortgages are recorded twice, first by the lender, and then by HUD. Thus, HUD holds a second lien on the mortgaged premises. If the lender declares bankruptcy or is unable to continue its obligation to make payments to the Borrower, HUD will make the payments instead of the Lender so that the Borrower will continue to receive the reverse mortgage disbursements.
Reverse mortgages are an important aspect of our society and government and are ultimately beneficial to the population, as a whole. However, as detailed above, they are quite complicated and Borrowers should fully understand what exactly the consequences and benefits of executing a reverse mortgage are not only for their future, but also for the future of their surviving family members’.
By: Maria Cheung