DO YOU FULLY UNDERSTAND YOUR OBLIGATIONS AS A BORROWER UNDER A REVERSE MORTGAGE LOAN?
Borrowers with reverse mortgages are not required to make monthly loan payments to their lender, but they must continue to meet certain criteria in order to remain current on the loan. The loan may become due and payable if these responsibilities are not met.
With a reverse mortgage, the home serves as collateral for the loan, which means that the lender has a vested interest in the property’s safety and condition and its absence of superior liens.
As a result, reverse mortgage borrowers must: live in the property for the majority of the calendar year; keep the home in good shape; pay all property taxes, insurance, and any condominium or homeowner’s association fees on time; and comply with all other loan terms. Consider the following:
Will you live in your home for the majority of the calendar year?
The subject of the mortgage must be the borrower’s main home. Every year, the borrower must sign an occupancy certificate and send it to the loan servicer to show that they are still living in the home.
Are you prepared to maintain the condition of your property?
The property will be inspected and evaluated as part of the application process. Homeowners are responsible for regular property maintenance and are obligated to keep the home in good shape from the time the loan is made. Failure to keep the house in good shape may result in the loan becoming due and payable.
Will you be able to pay your property taxes, insurance, and homeowner fees?
Borrowers are responsible for paying all property taxes, homeowners and hazard insurance premiums, as well as any relevant condominium fees, planned unit development fees, homeowner’s association fees, and any other special assessments mandated by local or state law.
Do you understand what will happen if you cannot pay your taxes, insurance, or homeowner fees?
If a borrower fails to make a tax or insurance payment, the loan servicer may advance the payment from available loan funds. However, if there are insufficient proceeds to cover the payments, the loan servicer may choose to advance its own cash to make the obligations. When this occurs, the loan is regarded to be in technical default, and the loan servicer has the option of calling the loan due and payable or negotiating a repayment plan with the borrower. If the repayment obligations are not satisfied, the loan servicer will declare the loan due and unpaid and may seek to foreclose on the property.
Do you understand your personal finances will be reviewed?
To help determine if a reverse mortgage is a sustainable option for borrowers, a policy was put into effect in 2015 requiring lenders to conduct a financial assessment of every reverse mortgage applicant to ensure that the applicant possesses the ability and willingness to pay ongoing costs, such as property taxes, homeowner’s insurance, and other financial obligations, over the expected life of the loan. Lenders examine, in part, the borrower’s debt and sources of income, such as Social Security, pensions and investments.
Suppose the financial assessment reveals an income deficit or credit issues. In that case, the lender may set aside a portion of the loan’s principal limit to pay for property taxes and insurance premiums during the life of the loan. The “put aside” diminishes the borrower’s available loan proceeds.