What If the Value of the House Goes Down If There Is a Reverse Mortgage?
- A reverse mortgage is a home loan available to seniors at least 62 years of age. Unlike a traditional home loan, the borrower does not need good credit or income to qualify. In addition to age, home equity -- which must be over 40 or 50 percent -- is the only qualification. The other significant difference between a reverse mortgage and a traditional home loan is that no payments on a reverse mortgage are required as long as the borrowers remain living at home. A reverse mortgage can be taken out as a lump sum, line of credit or in monthly payments. It must be repaid when the borrowers die, sell or move away from the house.
- According to the Department of Housing and Urban Development's (HUD's) handbook on reverse mortgages: "The HECM is a 'non-recourse' loan. This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt."
- Because reverse mortgages are non-recourse, all FHA reverse mortgages -- virtually the only type of reverse mortgage commercially available -- come with mortgage insurance. Should the sale of the house not cover loan repayment, the mortgage insurance will pay the lender the difference.
- In December 2008, HUD, which is the federal agency to which the FHA belongs, clarified its non-recourse policy. It stated that if the borrower or his heirs choose to keep the home instead of selling it when the loan comes due, then the full amount due must be paid as opposed to a lesser amount that might result if the house is sold. The borrowers and heirs are not required to keep the home. In fact, it is anticipated most homes mortgaged with a reverse loan will be sold to repay the loan. In this case, the loan is considered fully repaid through the sale whether the home value exceeds, meets or is less than the balance due.
- If the value of the home goes down after you have taken out a reverse mortgage, you benefit because your loan was based on the previous higher value and you are not responsible for any shortfall. And if the value of the home goes up dramatically -- more than is needed to repay the loan -- you also benefit. In this case, after the loan is repaid you or your heirs get the balance of the equity.
