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Reverse Mortgages: A Non-Recourse Loan

December 18th, 2011
     

One of the things that we always explain to senior borrowers when they ask about reverse mortgages is that they are non-recourse loans. The next question is always, “What is a non-recourse loan?” This is a very important feature of the reverse mortgage and I want to take a moment to explain just what non-recourse means and how that affects senior borrowers who get reverse mortgages and their heirs.

Simply put, a non-recourse loan means that the lender has only your property as security for their loan…they have no other way to obtain repayment of the principal and interest in the event something happens and your home is not worth enough to pay off the obligation including all interest and fees. Could this ever happen? The loan itself is designed utilizing actuarial tables and knowing when most borrowers will vacate their homes due to passing or other reasons. Some borrowers absolutely blow these tables out of the water living active productive lives many years beyond the average life expectancy.

Also, most properties historically have experienced appreciation and stay ahead in value of their loan balances.However, there have been times of extended downturns in values such as during recessions when growing loan balances exceed property values.This has been true due to money borrowed, accrued interest and charges; and longer than expected loans due to prolonged lives, etc.To those potential value risks, you must add those times in which there have been extreme drops in values of up to 50% and more in some markets.Many borrowers with traditional forward loans have found themselves with little or no equity under these circumstances even though they pay monthly payments.

While the interest rates are low, many don’t think about it but if the rates were ever to increase sharply on the adjustable rate reverse mortgages, then equity would be eroded much more quickly as well.A good example of this is to check the difference between the HUD Home Equity Conversion Mortgage(HECM or “Heck-um”) and a propriety jumbo reverse mortgage with an interest rate nearly 4% higher and see how much more quickly the balance rises on the higher rate mortgage. This is where the non-recourse nature of the loan is so important. Regardless of what you owe when the loan becomes due as a result of your moving out of the home or passing, you or your heirs can never owe more than your home is worth on a bona fide sale.

Now this “bona fide sale” provision is important to remember.In 2008, HUD came out with this clarification.If you or your heirs go to sell the home and the property is not worth as much as the reverse mortgage balance, then the home can be sold to a third party for whatever the market will bear, and you or your heirs will never be responsible to pay any shortfall.What it does not mean according to HUD, is that you or your heirs can simply keep the home by paying only the market value of the property, regardless of the outstanding balance of the loan.

HUD states that if you or your heirs intend to keep the property, then they will look to you to repay the balance of the loan.so the non-recourse provision protects you and your heirs in the event of sale, it does not allow you to keep the home on a short payoff of the reverse mortgage loan.

This means that you can live in your home for life, never make another mortgage payment, and never have to worry about passing an obligation on to an heir. In many scenarios, you still pass equity on to your heirs but that is really a function of property values and whether or not they continue to deteriorate, remain stable or improve.It’s nice to know that regardless of how much money you receive on your reverse mortgage, how long you live in your property, what the interest rates do, or what values do in the future, you or your heirs can never owe more money than the property is worth by simply choosing to sell the property to a third party if there is more money owed on it than it is worth.

Of course, if there is still equity in the property, then you or your heirs still have the option of realizing that equity as well.You always retain the upside potential without the downside risk that forward borrowers face.

The experts at All Reverse Mortgage® are here to answer your questions! If you have a question regarding reverse mortgages give us a call Toll Free (800) 565-1722 or request a quote by clicking here »

Reverse Mortgages: A Non-Recourse Loan By Mike Branson – Add me to your circles

PS – We also welcome and respond to comments below…

4 Comment(s)
Virginia Hutchins
11/30/08 5:59am
I would like to know if, a wife has signed off as a non-borrower, would she then convert to an heir rather than a suviving spouse? Under the non-recourse explanation, estates/heirs would become responsible for only the worth of the property. Please reply!
Cliff Auerswald
12/1/08 6:06pm
You have a asked a great question that really has two different answers. One relates to the ownership of the property and the other to the reverse mortgage loan and the non-recourse nature of the loan. First, if a spouse deeds off of a property in order to become a non-borrowing spouse, that individual’s future ownership interests in the property are dependent upon the method by which the couple has set up the transfer in the instance of the passing of the spouse (for example, through a trust, etc). Since you have deeded off of the property, you may not have the same rights of survivorship and would need to be certain that you did establish the method by which the property would transfer to the remaining spouse in advance to avoid probate and a trust would probably be the best method. We would always recommend that a borrower consult competent legal advice in this area. State laws vary and Elder Care Attorneys would be the best counsel in this area. The next part of the question relates to the non-recourse nature of the reverse mortgage. The reverse mortgage is a non-recourse loan regardless of who the successor to the property will be. Whether you will be the one inheriting the property or whether your spouse outlives you and it goes to other family members, the estate or the heirs cannot owe more than the property is worth. This is one of the guarantees made to the reverse mortgage borrower and why they pay the HUD mortgage insurance. Now a quick word of advice. We always recommend that borrowers contemplating removing one spouse from title to do a reverse mortgage seek competent financial and legal advice for a couple of reasons. Firstly, for the reason stated above, to make sure that the transfer back to the surviving spouse is seamless. Secondly, and just as importantly, to make sure that adequate plans have been made for the surviving spouse in the event of the passing of the spouse on title. Usually the reason one spouse is removed from title is due to age (either the spouse to be removed is not old enough to qualify for a reverse mortgage or they are younger and do not qualify for enough to pay off an existing mortgage, etc). Since the loan accrues interest and the remaining spouse is not likely to be able to qualify for a reverse mortgage large enough to retire the existing reverse mortgage in the event of passing, the borrowers should have a plan for this eventuality. For example, some borrowers have adequate life insurance and know the remaining spouse would not be left without a place to live. Others have told us that they would not want to live in the house anyway and have made other provisions. Whatever the case may be, the time to discuss it and plan for it is before a mortgage becomes due and payable.
Donna
2/11/09 10:48pm
Someone told me that Hud has re-worded what a non-recourse loan is for reverse mortgages have your heard anything
Betty
8/23/10 5:39am
At anytime does the company own the house? If my Ddaughter is left the house by us in our trust,will sher hjave to pay off the total of the losn borrowed from a reverse?

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