If you take out a reverse mortgage (a mortgage that converts some of the equity in your home into cash) you have certain responsibilities, such as paying taxes and insurance, that you need to keep up with otherwise you could face a foreclosure. Read on to learn more about your responsibilities after taking out a reverse mortgage.
Understanding Reverse Mortgages
Reverse mortgages operate differently than the traditional “forward” mortgages that most homeowners take out when purchasing their homes. With a traditional mortgage, a borrower makes payments to the lender and, as a result, his or her equity in the property increases over time as the loan balance decreases.
On the other hand, with a reverse mortgage, a borrower’s equity decreases since borrowers receive cash payments from the lender. In addition, interest and monthly service fees accrue on the reverse mortgage loan and the outstanding balance gets larger and larger as time goes by. (Learn more about reverse mortgages, including the Home Equity Conversion Mortgage, which is the most common type of reverse mortgage available, at www.hud.gov. Enter “Home Equity Conversion Mortgages for Seniors” in the search box to access important information.)
Your Responsibilities When You Take Out a Reverse Mortgage
Even though you don’t have to make monthly mortgage payments to the lender with a reverse mortgage, you do have certain responsibilities as a homeowner.
The Reverse Mortgage Must Be the First Lien
Generally, the first obligation is to pay off your first mortgage, if you have one, with the reverse mortgage funds.
You Must Abide By All of the Loan Terms
You must also comply with all of the terms of the reverse mortgage. For example, the reverse mortgage will state that the loan must be paid back when you:
- no longer occupy the home as your primary residence
- sell the home (or transfer the title)
- die, or
- fail to meet an obligation under the mortgage.
The terms of the mortgage will most likely require that you notify the lender if any of these triggering events occur. Your responsibilities will be explained in your mortgage, so be sure to read the fine print carefully.
Taxes and Insurance
You must remain current on your real estate taxes, as well as keep up with hazard insurance and flood insurance (if applicable) premiums. If you do not pay your taxes or insurance, it could cause your reverse mortgage to be placed in default status, which can eventually lead to a foreclosure. (Learn more in Nolo’s article Foreclosure of Reverse Mortgages.)
To help ensure that borrowers do not go into default due to unpaid insurance or property taxes, certain changes went into effect January 13, 2014, for Home Equity Conversion Mortgages including:
- the lender must complete a financial assessment in making a reverse mortgage loan to ensure that homeowners can afford the taxes and insurance payments, and
- the lender must establish a set-aside account for taxes and insurance if it determines that a homeowner might fall behind in these obligations, or
- the lender can pay the taxes and insurance through disbursements from the line of credit (or by withholding sufficient amounts from the monthly disbursements).
(Learn more about these changes, as well as new restrictions on reverse mortgages including a reduction in the initial amount available to borrowers who take out a reverse mortgage, in Nolo’s article New Restrictions on Reverse Mortgages.)
Maintenance Costs and Property Upkeep
You are also responsible for completing mandatory repairs and maintaining the condition of your property. You cannot commit waste, destroy, damage, or substantially change the property or allow the property to deteriorate. Reasonable wear and tear is acceptable.
Homeowners' Association (HOA) Fees
You also need to pay your HOA fees, as required by your community. (Learn more about HOAs and the types of fees that they typically impose.)
If your home is on leased land, you must comply with the provisions of the lease. (Mortgaged homes located on Native American tribal land are often set up as a leasehold estate. Learn more about mortgages and Native American land in Nolo’s article Tribal Land Foreclosures.)
Read More About Reverse Mortgages
Find out more about reverse mortgages at AARP’s website at www.aarp.org/revmort.