What Are Homeowners Responsible for Paying Under a Reverse Mortgage?

Learn what homeowners are responsible for paying under a reverse mortgage. Find out what type of loan is available through an FHA-approved lender and how lenders evaluate borrowers' finances.

What Are Homeowners Responsible for Paying Under a Reverse Mortgage?

If you own a home, condo, townhouse, or manufactured home built on or after June 15, 1976, then you may be eligible for a reverse mortgage. Also known as a Federal Housing Administration (FHA) reverse mortgage, this type of loan is only available through an FHA-approved lender. With a reverse mortgage, the lender typically makes periodic payments to you instead of the other way around. Before granting a reverse mortgage, the lender evaluates the borrower's finances to ensure that they have enough resources to keep up with property taxes and homeowners insurance for the next few years (and flood insurance, if applicable).

If the lender determines that the borrower is likely to fall behind in paying taxes or insurance premiums, it establishes what is called a reserve account as part of the reverse mortgage. It's best to talk to a HUD-approved advisor before committing to a reverse mortgage (and if you're looking to get a HECM, you'll have to). That way, no unscrupulous lender or predatory fraudster will be able to take advantage of them, they will be able to make the right decision even if they hire a poor quality reverse mortgage advisor, and the loan will not be accompanied by unpleasant surprises. Your home must be kept in good condition and must be your primary residence.

Even if it does, due to a drop in the market value of the home or if the borrower lives longer than expected, the borrower or their estate will not be responsible for paying the difference to the lender thanks to the program's mortgage insurance. Mortgage insurance premiums paid by borrowers go to a fund that covers lenders' losses when this occurs. Normally, a homeowner with a reverse mortgage pays their own taxes and insurance, EXCEPT if they don't meet the program's residual income or credit requirements. If you don't have home insurance and a fire breaks out in your house, the lender's warranty is damaged.

Even after a counseling session on the HECM, many borrowers still don't fully understand all of the terms and requirements of the reverse mortgage. Family members, caregivers and financial counselors have also taken advantage of older people, either through a power of attorney to cancel the home mortgage and then steal the profits from them, or by convincing them to buy a financial product, such as an annuity or a whole life insurance policy, that the elderly can only afford if they obtain a reverse mortgage. However, with a reverse mortgage, you can borrow up to 60%, or more if you're going to use the money to pay your term mortgage. Because lenders can't ask homeowners or their heirs to pay if the loan balance exceeds the value of the home, insurance premiums provide a reserve of funds that lenders can draw on so that they don't lose money when this happens.

Sheree Mccomas
Sheree Mccomas

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