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Who Covers Shortfall On Reverse Mortgage?

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Posted On: 04/15/2015

QUESTION:

I’m moving from my current home, which is financed with an FHA reverse mortgage. The balance is about $219,000, but the value of the property is only $190,000. Who is responsible for the sale of the present home and the security, maintenance and other fees during the process? Who is responsible for the shortfall or will that be forgiven?

ANSWER:

An FHA reverse loan, what the government calls a “home equity conversion mortgage” or HECM, is an unusual form of financing. Available to borrowers age 62 and older, the size of the loan has traditionally been based on the home’s equity and not the borrower’s income or credit. With a reverse mortgage the borrower gets cash from the home but is not required to make monthly payments for principal and interest. The result is the size of the loan grows each monthly because of unpaid interest charges.

The loan must be repaid if the borrower sells, moves or passes away. By moving you will set off an acceleration clause, which means the loan immediately must be repaid in full. At this point there are two choices. One is that the lender can be repaid by selling or refinancing, or the property can be turned back to the lender.

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Under the HECM program you must notify the lender of your intent to move. You remain responsible for security, maintenance, taxes, insurance and such until title to the property is transferred. If the lender can sell the property for more than the debt and all related closing costs then the matter is closed. If the sale value is less than the debt the lender will file a claim against the FHA to collect any unpaid money.

As to forgiveness in the event of a shortfall, there is nothing to forgive. An FHA reverse mortgage is a “non-recourse” loan product. It’s secured by the value of the property, whatever the value of the property might be. There will be no claims against you. In the case of an estate, there are no claims against the heirs if the property is sold at a loss.

While reverse mortgage borrowers do not face a monthly cost for loan principal and interest payments they must pay for such things as property taxes, property insurance and homeowner’s association fees. Not paying these costs can set off a foreclosure action – and ultimately, big claims against the FHA. To assure that borrowers can make their non-mortgage payments, as of April 27, 2015, the government will require lenders to make a “financial assessment” of all prospective FHA reverse mortgage borrowers, including a review of recent tax returns. If a borrower has iffy financing, the lender can require a “Life Expectancy Set-Aside” to cover such costs, meaning that less money can be taken out of the house in the form of cash to the borrower.

For further information, contact your loan servicer or the FHA Servicing Center.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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