Reverse mortgages have been around for a while -- the first was approved in Maine in 1961. However, the federal government didn't take control of the concept until 1988. The Federal Housing Administration established its home equity conversion mortgages program, and it insures approximately 90 percent of reverse mortgages as of 2012. They can be a great help to senior homeowners, but homeowners have certain responsibilities under their terms, including keeping up with property taxes and hazard insurance.
How Reverse Mortgages Work
You can't qualify for a reverse mortgage until age 62. A reverse mortgage is essentially a loan against the equity in your home, and your home secures the note. Unlike a home equity loan or a traditional mortgage, however, you don't have to repay the loan monthly. It doesn't come due until you die, sell your home, or move out, although residence in a nursing home is permissible for up to a year. When any of these events occur, the reverse mortgage balance is repaid with interest, anywhere from 2.5 to 4.99 percent accruing over the life of the loan. The lender can make regular monthly payments to you for the approved amount of your equity, or you can establish a line of credit and draw against the loan proceeds. You retain ownership of your home; it doesn't transfer to the lender.
Because you still own your home, you're responsible for all the associated costs you would normally pay with a traditional mortgage. The homeowner is responsible for paying property taxes, and for keeping insurance coverage in place to protect against damages to the property. The condition of the property must be maintained because it secures the reverse mortgage loan – you can't allow the place to fall into disrepair. You're still responsible for the paying the utilities. The FHA requires that all potential borrowers attend counseling before they close on the loan so they understand their responsibilities under the terms of the mortgage.
Your lender can call the loan due and foreclose if you don't keep up with the costs assigned to you, but the process isn't as immediate or unforgiving as it typically is with a regular mortgage. The FHA requires lenders to give reverse mortgage homeowners two years to catch up with past-due payments for insurance or property taxes. Even beyond that time, they can't foreclose without FHA approval, and they must prove that they did everything possible to help you fix the situation before the FHA will grant it. As a practical matter, however, you'll probably have more immediate problems if property taxes aren’t paid. Many county or municipality authorities will initiate a tax lien sale of the property well before two years if property taxes aren't paid.
If you or your aging parent is in danger of defaulting on the terms of your reverse mortgage due to unpaid taxes or insurance, you have options. Your lender may be willing to catch up the payments, particularly if your county or municipality has schedule the property for a tax lien sale. The cost is typically added to the loan balance or, if your loan is a line of credit, the money can be taken from what remains, leaving less available for disbursement. If you're receiving monthly payments, the lender may adjust them downward to reimburse the taxes and insurance it had to pay to help you catch up.
- Inman News: Property Taxes a Surprise Risk in Reverse Mortgage Lending
- Mortgage News Daily: Tax and Insurance Responsibilities of a Reverse Mortgage Borrower
- Federal Trade Commission: Reverse Mortgages – Get the Facts Before Cashing in on Your Home's Equity
- UNC School of Law: Reverse Mortgages – Changes Brought About by the Housing and Economic Recovery Act (PDF)
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.