A HECM Reverse Mortgage is a Non-Recourse Loan

reverse-mortgage-non-recourseSome homeowners age 62 and older who have significant equity in their homes may be considering a Home Equity Conversion Mortgage (HECM) reverse mortgage loan as part of a comprehensive retirement plan to help them live a better retirement.

For some seniors, their house is their largest asset. Taking a reverse mortgage loan can allow you to increase your retirement income by accessing a portion of the equity you’ve built up in your home. If you’re concerned about the financial legacy you leave your heirs, a HECM reverse mortgage gives your heirs the option of keeping the home by paying off the reverse mortgage.

HECM reverse mortgage loans are insured by the Federal Housing Administration (FHA). If you are researching reverse mortgage loan options, you have likely come across the term “non-recourse loan” as all HECM reverse mortgages are non-recourse loans.

Having a non-recourse loan means that neither you nor your heirs will ever 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.

The loan becomes due when you sell your home, move out of the home as your primary residence or pass away. At that time, you or your heirs can choose to repay the reverse mortgage loan and keep the home or put the home up for sale in order to repay the loan.

If your heirs want to keep the home, they will have to pay off the loan. However, they won’t have to pay more than the home is worth. “If the loan balance is more than your home is worth, they will only have to pay 95 percent of the current appraised value of your home. The FHA insurance will cover the rest. If the loan balance is less than the value of your home, they will only have to pay the loan balance.”1

If your heirs choose to sell the home to repay the loan, they will not be required to pay more than the sale price of the home. 1 “The insurance will pay for any shortfall, so long as the home sells for at least 95 percent of the current appraised value.1 If the home sells for more than the loan balance, then your heirs can keep any remaining proceeds after paying the loan off.

If your heirs want to keep the home, but do not have enough cash to repay the loan, they may be able to pay off the loan by getting a traditional mortgage. However, they would still need to meet all the typical requirements for getting a traditional mortgage such as: making a down payment, passing a credit check and having a stable income.1

It’s best to make sure your heirs are comfortable with this option. In addition, it is highly recommended that you speak with a financial advisor to discuss which repayment option would be best.

Once the loan becomes due and payable, the estate has six months to satisfy the debt. Any extensions to this time frame must be approved by the Department of Housing and Urban Development (HUD).

If the homeowner has no heirs or the loan servicer doesn’t receive any response to their letters, then the servicer may begin the foreclosure process. “If, however, you or your estate are actively working to either refinance your property or sell your property so as to satisfy your reverse mortgage, then foreclosure may be forestalled.”2

Proprietary loans are another type of reverse mortgage. However, they are not FHA insured and often have different loan terms.1

Regardless of the type of reverse mortgage loan you are considering, make sure to weigh your options and speak with a reverse mortgage advisor or financial advisor to see which product would be best for you. For more information to see if you qualify, use our reverse mortgage calculator at the top of this web page or call 800-976-6211.