FHA loan denials are increasing daily. Most people understand the Free Assumability issue when it comes to purchase money loans and refinance loans. But increasingly I am asked why a reverse mortgage would be an issue.
Let’s review what a reverse mortgage is. Most reverse mortgages today are FHA insured. You may see them referred to as HECM (Home Equity Conversion Mortgage) loans. Not all reverse mortgages are FHA insured, but for our purposes we will discuss FHA insured reverse mortgages today.
We usually think of senior citizen homeowners who have large amounts of equity or own their home as using reverse mortgages, but increasingly seniors are purchasing homes with a reverse mortgage.
When a homeowner chooses to take a reverse mortgage they also agree to abide by specific terms in the loan. They agree to pay property tax, utilities, homeowner’s insurance, HOA fees, flood insurance premiums (if required) and other property related expenses.
The homeowner agrees to maintain the property at the same level as when the reverse mortgage was obtained and the homeowner agrees to occupy the home as their primary residence.
When a homeowner passes away or leaves the home for a year or more, the loan must be paid back with interest and fees. If the loan is not paid back, then the lender initiates foreclosure proceedings.
With all this said, what are other reasons foreclosure would be an issue? The short answer is: Whenever the terms of the loan are not abided by. If the homeowner doesn’t pay property taxes or becomes late on HOA fees, they are in default on the loan. If a homeowner doesn’t maintain the property or homeowner’s insurance, they are in default on the loan.
If a homeowner fails to occupy the home as their primary residence or leaves the house for a year or more, they are in default on the loan. I have read about homeowners who went on extended travel (more than a year) and found they were in default on their reverse mortgage.
Some married couples find themselves in difficulty if one spouse is on the loan and the other is not. If the borrower spouse passes away or moves to an assisted living facility or nursing home, the loan becomes due. If the non borrower spouse is unable to pay back the loan, foreclosure action will be taken.
These are just some of the reasons a reverse mortgage may go to foreclosure, and why the FHA Free Assumabilty Clause causes FHA Reverse Mortgage loan denials.
If you are considering a reverse mortgage, speak to a qualified lender AND your attorney. Make sure the decisions you make and the way you hold title are consistent with your estate plan.