Non-Recourse Reverse Mortgage Protections Explained

August 5, 2021

What is a Non-Recourse Reverse Mortgage?

The Non-Recourse feature of the reverse mortgage is something that is often misunderstood by the general public and has been the topic of a recent lawsuit between AARP and HUD over the interpretation and implementation of it.

Simply, a Non-Recourse reverse mortgage means that a borrower can never owe more than their home is worth at the maturity of their reverse mortgage loan.

What does this mean and how does this benefit the consumer? I will give you an example of just how advantageous this feature of the product can be.

Example of a non-recourse protection

For Example, a 66 year old homeowner with a $500,000 home currently qualifies for $321,000 in available funds on the Fixed Rate Reverse Mortgage product based on today’s parameters.

Over the life of this Reverse Mortgage, the homeowner’s balance is going to increase and after 20 years of interest accrual and the homeowner enjoying being payment free the balance could exceed $1,000,000.

Now, their home may have appreciated in that time, it could have stayed the same or even decreased in a possible down real estate market.

The Non-Recourse feature of the Reverse Mortgage guarantees that the maximum amount owed on this Reverse Mortgage at this 20 year mark if the homeowner were to have passed away, would be whatever the home appraises for in year 20.

If the home appraises for more than $1,000,000 for example, the heirs to the property can either sell the property to pay off the Reverse Mortgage and take the proceeds as inheritance, or they can choose to refinance the Reverse Mortgage with another loan to pay off the balance and keep the home.

The choice is entirely up to the heirs of the property. In a worst case scenario, let us assume that the property was only worth $500,000 in year 20 when the Reverse Mortgage borrower passed away.

Under this scenario, the heirs to the property can choose to sell the property, refinance the property or wash their hands of the property completely and leave it to the bank.

Either way, the maximum amount owed is $500,000 and the Lien Holder cannot come after the estate for the difference between the accrued balance and the current value of the property.

In this case, HUD would guarantee the Lender’s loss on the loan because the Reverse Mortgage is a Federally Insured Program.

Amortization example on interest owed

HUD issued Mortgagee Letter 2008-38 which clarified and changed their position on the interpretation and implementation of the Non-Recourse feature of the Reverse Mortgage program.

This is where the lawsuit from AARP comes into play

Before this Mortgagee Letter in 2008, the Non-Recourse feature applied to any circumstance involving a maturity event on a Reverse Mortgage.

Basically, when a Reverse Mortgage loan was deemed as due and payable because of a “Maturity Event”, the Non-Recourse feature was in place no matter what the heirs chose to do with the property.

What this means is, whether the heirs chose to sell the home or refinance the Reverse Mortgage and keep the property, the max that could be owed to the Lender was what the home appraised for at that time.

However, Mortgagee Letter 2008-38 stated that this would only apply to a bona-fide sale transaction where the heirs or the bank were selling the property to a 3^rd party purchaser of the home.

What this did was prevent the heirs from having the option of refinancing the Reverse Mortgage with a new loan, or coming up with the required funds to pay off the Reverse Mortgage based on the value of the home at maturity.

For example, if the home appraised for $500,000 and the balance owed on the Reverse Mortgage was $600,000 the heirs would have to come up with $600,000 if they wanted to keep the home.

This brings me back to the AARP lawsuit. AARP’s lawsuit against HUD was to eliminate this change to how the Non-Recourse feature was interpreted and implemented for Reverse Mortgage loans. Mortgagee Letter 2011-16 rescinded Mortgagee Letter 2008-38 and HUD has now re-imposed the original Non-Recourse policy.

This is the peace of mind enjoyed by all homeowners who obtain a Federally Insured Reverse Mortgage.

No matter how long someone has a Reverse Mortgage on their home for and no matter how much interest accrues on their loan while they enjoy no monthly mortgage payments, they will never be “personally” obligated for the balance of the loan.

The property that is owned by the individual is the sole collateral for the Reverse Mortgage loan.

Non-Recourse FAQs

What happens if the reverse mortgage balance is higher than the property value?

The mortgage balance exceeding the property value has no bearing on the reverse mortgage. If you are still living in your property and maintaining taxes and insurance, etc. your loan is still in good standing and any funds still available in your line of credit can be advanced. If the last surviving borrower permanently leaves the home when the balance exceeds the property value the estate is not responsible for any difference. The loan is non-recourse meaning that you can never owe more than the value of the property. On a Home Equity Conversion Mortgage (HECM) the mortgage insurance fund would cover any loss when the property is sold.

What happens if I live beyond 100 years old?

There is nothing that happens on a reverse mortgage as it relates to reaching a specific age. Many people ask about this because the actuarial tables for life expectancy and loan to values for a reverse mortgage stop at age 99. A reverse mortgage loan remains in good standing for as long as you occupy the property as your primary residence, pay the property taxes and homeowners insurance on time and maintain the property.

Can the bank/servicer go after my heirs or other assets if I borrow too much?

The reverse mortgage is a non-recourse loan so it is not possible to borrow too much. The only security the lender has and from which the lender may seek repayment for the obligation is the house. They cannot look to your heirs or your estate for additional repayment.

How do you get out of a mortgage that is upside down?

There is no benefit to voluntarily leaving a home early that is upside-down in value. You can stay in the house regardless of the shortfall but when you pass, or must leave the home due to the need for assisted living, etc., all you must do is contact the lender and inform them that you will be vacating. Your heirs have the option of paying off the debt at 95% of the value of the home if they wish to keep the property but if not, you can deed the home back to the bank if the title is clear or the bank will initiate a foreclosure. Either way, the lender cannot seek repayment from any other assets.

If I do a deed in lieu of foreclosure on a reverse mortgage will it ruin my credit?

Most of the time a Deed in Lieu of Foreclosure is done at the very end of the loan when borrowers are entering assisted living and credit is not a factor any longer. Lenders don’t even report reverse mortgages to credit repositories. However, if you do a Deed in Lieu of foreclosure early simply because you no longer wish to live in your location and then seek other financing on another property later, there is no way to determine how a new lender would look at that later.

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27 Comments on this Article

Cathy
July 8th, 2023

Hello ARLO,

I am an only child, and my dad did a Reverse Mortgage, and he passed away in March. I have been trying to work with HUD Comp-U-Link. They have been hard. He owes more than the home is worth. I am fixing to tell them to go ahead and foreclose on the house. Can they come after me trying to get me to pay? I did not sign the loan. He has nothing but the house. I have been paying the Homeowners insurance with his little money. I will send them a letter telling them the house is empty and for them to foreclose on it. I am going to stop paying the Homeowners Insurance.
Reply to Cathy
- ARLO™
  July 8th, 2023
  
  Hello Cathy,
  The reverse mortgage is non-recourse, which means neither the lender nor HUD can ever go after any other assets of the borrower or their estate for repayment of the loan other than the property. And you are correct in that you never agreed to pay one red cent, so they had no agreement with you to pay anything even if the loan was not a non-recourse debt. You are within your rights to contact the lender at any time and advise them you will not be repaying the loan and that they should begin the foreclosure proceedings without delay as the home is abandoned and is not secure.
  Reply to ARLO
Larry
January 20th, 2023

My Blind Mother was required to obtain a POA due to her blindness to take out a Reverse Mortgage... Day of closing the Reverse Mtg paperwork was wrong the closing agent came back and closed the loan without the Blind mother's POA. The judge said she was competent even though the MTG co thought she wasn't requiring Mother to obtain Dr notes POA paper requirements and other financial requirements for the POA to sign documents. We fought in court they got judgment... but their judgment says all Defendants which are heirs must pay any deficiencies. A non-recourse loan and HUD letters specifically speak volumes about nonrecourse and a lender can only go after collateral. I called HUD and they told me it's up to the Attorney and their servicer... How can they go after the heirs for a deficiency and how can hud leave it up to the lender when the MTG insurance takes care of all deficiencies?
Reply to Larry
- ARLO™
  January 22nd, 2023
  
  Hello Larry,
  Blindness does not equate to incapacitation. While accommodation must be made for blind borrowers, a POA is not required unless the borrower also lacks capacity. When you say you fought in court and the judge made a ruling though that all defendants must pay based on the court ruling, I honestly cannot comment on the circumstances.
  A reverse mortgage is a non-recourse loan, and it is specifically spelled out as such in the loan documents. Furthermore, I'm not aware of any circumstances where non-borrowers can be held liable for any portion of a debt for which they never signed a promissory Note agreeing to accept responsibility for that debt whether the loan was recourse or not.
  Simply put, if you never agreed to repay a loan by signing on the dotted line, the lender cannot look to you and ask you to pay any of your relatives' debts. I can't help but think there is something there is some piece of the puzzle missing here. Most reverse mortgages go through a non-judicial foreclosure if that is required, and the lender would receive the property through a Trustee's Deed upon Sale if no one out bid the lender's opening bid.
  And yes, the lender would then make a claim to FHA/HUD for repayment of any losses. I can't for any reason think of why there would be a reason to go through a court foreclosure or that the Court would order heirs to make any payments unless the lender or court felt that there was wrongdoing on the part of those heirs that resulted in heavy losses.
  I've heard that lenders and HUD may begin cracking down on borrowers and heirs who falsify documentation when the borrower(s) don't really live in the property and rent it out instead creating excessive losses for the insurance fund, is that what happened here? Because if not, there should be no recourse to heirs or even to mom's estate. If there was any wrongdoing, that would be a different issue and would not shield people from legal judgments or even prosecution.
  Reply to ARLO
Anthony B.
March 2nd, 2022

If I have a reverse mortgage one property but I own two, in the case of my death will the lender take the other house as well?
Reply to Anthony
- ARLO™
  March 2nd, 2022
  
  Hello Anthony,
  
  Not only can the lender NOT touch any other property you own, they cannot look to any other assets you or your heirs or your estate have to repay the obligation. The property is the sole security for the loan. And by the way, the lender does not automatically get this house either.
  Your heirs have the option to keep the home by paying off the existing loan or 95% of the current market value, whichever is less; or they can sell the property to keep the equity if the home is worth more than is owed on it or they can simply walk away and let the lender take the home but the lender is not the entity that has the choice - your heirs have that choice.
  But as I said, the lender cannot look to any other assets to repay the obligation so your other property is never in jeopardy of being taken as repayment of your reverse mortgage.
  Reply to ARLO
Wanda
November 26th, 2020

My mother is now living with me and I am also her legal guardian because she has advanced dementia due to Alzheimer's. She is still legally married, and my stepfather is still living in their house. He is unable to care for her due to his declining health. They took out a reverse mortgage years ago and are upset down on the loan. They have already been paid for whatever equity they had so they are no longer receiving monthly payments from the mortgage company. I am thinking about taking my mom off the title because I do not want her to have any liability associated with the house. Can or should I try to take her off the mortgage as well or should I leave things alone. I do not get along with my stepfather and he doesn't even call for her anymore. I just do not want my mom to have any liability or legal responsibilities tied to the house if he dies before her especially since it will fall on me to take care of.
Reply to Wanda
- ARLO™
  November 26th, 2020
  
  Hello Wanda,
  
  I cannot advise you on legal matters with regard to any potential liability from property ownership.
  For that advice, you really should seek the counsel of an attorney.
  I can tell you that as far as the loan is concerned, it is a non-recourse loan which means it has no personal liability and the lender can never seek repayment from your mom, they have only the property to look to for repayments.
  So as far as the loan is concerned, she has no personal liability.
  Which is a good thing because I do not believe just signing a Deed to remove her name from the title now would not have eliminated her contractual obligations to which she agreed when she signed the legal documents.
  The attorney can advise you though whether it is necessary or advisable.
  Reply to ARLO
Kayla L.
September 20th, 2020

Hi Arlo,

My 86-year-old father has a reverse mortgage. He may need to move out of state to live with me due to health issues. He is concerned that he has been unable to maintain the upkeep on the home. If there is no equity and the home is worth less than the loan, can they force him to pay for repairs?
Reply to Kayla
- ARLO™
  September 20th, 2020
  
  Hello Kayla,
  
  The reverse mortgage is a non-recourse loan.
  The lender and HUD will not look to your father to make up any shortfall once the property is sold to repay the loss.
  Reply to ARLO
Barbara E.
March 9th, 2020

I once read that in a reverse mortgage case in which the owner received all of the house's value before dying, and the lender is now demanding repayment in full, that the executor of the property can become the owner if the lender demands far more repayment than it loaned the deceased and also far more repayment than the property's assessed value. Is this true? By what law or ruling? Thank you.
Reply to Barbara
- ARLO™
  March 9th, 2020
  
  Hello Barbara,
  
  I sure wish I could see the article so I could address them directly. Not only is that blatantly false, the loan documents specifically state that the loan is a non-recourse loan and that the only security the lender has is the property itself.
  The lender cannot seek repayment from any other assets and if they are claiming that the heirs can become liable, again, that is just false.
  The heirs never signed any agreement to pay anything so how could a lender enforce an agreement on someone who never signed that agreement?
  The heirs can walk away and let the lender take the property and owe nothing or they have the option keep the home and repay the amount owed or 95% of the current appraised value, whichever is less.
  
  This is a case of whoever wrote the article you read was not even close to accurate about the program. Borrowers pay mortgage insurance that ensures they will always receive the money they are entitled to receive and that their heirs will never have to pay any shortfall on the loan.
  It does not happen as often as it used to, but we still see articles written by people who have no idea how the program works and it's a real shame that they spread so much misinformation.
  Reply to ARLO
Michelle D.
February 7th, 2020

My mother's reverse mortgage was underwater when she died. I let the lender foreclose and sell the property without contest. I thought that was the end of it. Now the lender has sent the estate a Form 1099-A showing the $42,000 difference between the debt and the value of the home. I understand that the estate doesn't owe the lender the $42,000, because the reverse mortgage was a nonrecourse loan, but the implication of sending the 1099-A is that the estate will owe the IRS tax on that amount. I've already distributed all the assets of the estate to the two heirs (myself and my brother). However, the estate is still open pending the conclusion of a lawsuit in which the estate is the plaintiff. Are the heirs going to be on the hook for tax on that $42,000?
Most of the estate assets were distributed to the heirs in 2018. A Form 1041 was filed for 2018.
The remainder of the estate assets were distributed in 2019. The reverse-mortgaged property was sold by the lender in 2019. Will I now need to file a Form 1041 for 2019 as well and report income of $42,000? If I don't have to report the $42,000, then the estate's income for 2019 will not meet the minimum threshold for requirement to file.
Reply to Michelle
- ARLO™
  February 10th, 2020
  
  Hello Michelle,
  We are restricted by law from giving legal or accounting advice. There is so much to consider when a home is sold that must be determined by your accountant or tax adviser and that may change based on filing status, gains, and other circumstances. I would not even suggest which filings to use as it would not only violate the terms of my licensing, but since I don't know everything needed, I would not be the one from whom you should take this advice. I would strongly suggest that you seek the advice of a competent tax professional.
  Reply to ARLO
Isabel S.
September 18th, 2019

My mother has a reverse mortgage. The loan exceeds the value of the house. If she must move to a nursing home can the bank garnish her social security check to pay back the loan?
Reply to Isabel
- ARLO™
  September 18th, 2019
  
  Hello Isabel,
  The reverse mortgage is a non-recourse loan. No matter what the balance is or the value, the lender can never seek repayment from any other asset than the home. So, to answer your question directly, no, the bank can never garnish your mom's check nor can they force payment from funds in the bank or anything else. Foreclosure of the property is their only option.
  Reply to ARLO
Michael B.
August 8th, 2019

I am living in my parents' house who both died a year and a half ago. I've been in the house not paying rent. The house went for foreclosure on March 17th, 2019, I still have nowhere to live. I can't afford to rent anything; my credit is bad. it is now August 5th 2019 I've gotten three different letters asking me to go to court. I didn't go because the house is not in my name. I just stayed here to help my parents for 5 years ..I don't know where to live.. do I have to pay back all this money? Because I haven't paid any rent since I've been here. I just pay the utilities can they come after me for the back payment of rent? They are charging my parents $40 a day. My name is not on the lease my name is not on anything but, both my parents are gone. Can the bank come after my vehicle that I just bought for my job?
Reply to Michael
- ARLO™
  August 8th, 2019
  
  Hello Michael,
  
  The loan is a non-recourse loan which means the lender cannot seek repayment from any other assets from your parents' estate or from you. You need not worry about having to repay any of the obligation, but you do have to worry about finding a place to live as that will not be much longer if the foreclosure started in March.
  Reply to ARLO
Lewis G.
June 10th, 2019

Just found out father has taken lump some on reverse mortgage. He has much younger girlfriend since mom passed away a few years ago. He has no money left on this reverse mortgage. No one in family wants house so if he does decide to leave his house to girlfriend would any other family members need to be involved? What happens if he should leave house to me. I am responsible to pay reverse mortgage before I could sell it , correct?
Reply to Lewis
- ARLO™
  June 10th, 2019
  
  Hello Lewis,
  
  The reverse mortgage is a loan just like any other loan. To sell the property, you or anyone else would find a buyer and enter into an agreement to sell. Once you were ready to close the transaction, your title company or other settlement provider would send a request for Beneficiary's Demand to the lender from which the provider could send in the payoff funds to clear the lien so that the new owner would have clear title subject only to whatever liens/loans they used to purchase (if any).
  It would not have to be done "before" you sell the house, as with most all transactions, it would probably be a simultaneous procedure.
  Reply to ARLO
Nicole D.
June 10th, 2019

Hello. Mom died in March and her condo was substantially underwater. It was in Illinois, but I moved her to Minnesota in September so I could care for her. During that time, her HOA dues lapsed, as she had to pay for medical and nursing home cares. Now her HOA is suing me for these monies. Am I correct that it is the new owner of the home - i.e., the reverse mortgage bank who holds the lien - who is now responsible for these debts? Mom died without assets or a will and had indicated that she wanted her condo to go back to the bank when she passed.
Reply to Nicole
- ARLO™
  June 10th, 2019
  
  Hello Nicole,
  
  It's not quite that simple. Did you Deed the property back to the lender? You said that you moved her back to Minnesota in September, but did you contact the lender before or after and plan to transfer the title? The reverse mortgage is a non-recourse loan and the lender will never seek repayment for the loan from any other assets.
  But unless you and mom decided to transfer ownership of the condo to the lender, or there has been a foreclosure, she or her estate still owns the unit. No matter how much the balance of the loan exceeded the value of the unit, heirs can never be made to pay a deficiency balance on a reverse mortgage. The condo HOA is different issue to which I cannot speak.
  
  The HOA, any insurance claims or other obligations mom had as a property owner are not "assumed" by the lender because you chose to move mom out of the unit. If there are outstanding liens or claims, the lender will not even accept a Deed in Lieu of Foreclosure because they would have to take the property including those other liens. If other liens are present, they will opt for a foreclosure action which would force a sale at auction which would eliminate any other liens.
  
  I honestly do not know what rights the HOA has now or what obligations they can look to you or to mom's estate at probate to settle. I would suggest that you contact an attorney to determine what your legal rights and obligations are at this point. As I stated earlier though, you do not have to worry about the loan, there will not be a deficiency amount on that no matter how far underwater the loan became.
  Reply to ARLO
Kristeen Barclay
November 26th, 2018

In the case of catastrophic disaster (like the Paradise / Camp Fire) what are the obligations/requirements of the home owner? My home was a complete loss and the town and area are unlikely livable for some time to come. kdb
Reply to Kristeen
- ARLO™
  November 26th, 2018
  
  Hello Kristeen,
  Let me start by saying how sorry I am that you must go through this. HUD works with servicers and borrowers during times of natural disasters and they will work with you at this time as well. Just like times of flooding, earthquakes, hurricanes, etc., everyone realizes that there will be some time to sort things out and then resources will be stretched during the rebuilding process.
  Contact your loan servicer and they will let you know how best to proceed but rest assured, they are no stranger to the results of natural disasters and will know how to work through this with you that will best make sense in your circumstances.
  Reply to ARLO
- ARLO™
  November 26th, 2018
  
  Good Morning,
  That's odd. They should be sending you a monthly statement. I do not know how long it's been since you received the last statement, but if you take that statement and look at the amount of money you owed and then look at the interest and any fees accruing, you can determine about what you owe from that (don't forget to add any new funds you withdrew, if any).
  For example, if your amount owed was $100,000 and you were accruing $600.00 per month interest at that time and it's been three months, you will have accrued a little more interest as the balance grows but it won't be tremendous. You can round for the purposes of estimating the amount but add the $600 three times. If you take the amount that the last statement rose (i.e. the interest amount was $10.00 higher than the previous statement), you can keep increasing the amount by this much in your estimate. This is by no means an exact method to determine your balance, but it will get you close enough to know about where you stand and what you need to do for a refinance of the loan.
  Unless you are so close to being able to get a new loan that $100 either way would make or break the new loan, you can proceed with your refinance and the settlement agent would send in a request for a Beneficiary's Demand to pay off the existing loan. The lender has only a certain amount of time by law to produce the demand or face penalties. But we can already be well on your way to completing your new loan before the demand is even requested by the settlement agent. I wish you luck.
  Reply to ARLO
tom mccall
August 6th, 2017

will I still have a tax write off for my home if I have a reverse mortgage?
Reply to tom
Jane Horton-Leasman
April 18th, 2011

Are the circumstances the same as "death"/estate, as with a person with a Reverse Mortgage and they have to sell and relocate. Is it still a non-recourse when the property has depreciated and is sold for considerably under the amount the Reverse Mortgage has accrued to?

Does the Reverse Mortgage owner have recourse under these circumstances, vs death/estate selling the property?

Thank you,

Jane Horton-Leasman
Reply to Jane

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