Understanding Non-Recourse Reverse Mortgages

The Non-Recourse feature of reverse mortgages is often misunderstood by the general public.  It has even been the subject of a notable lawsuit between AARP and HUD over its interpretation and implementation.

A Non-Recourse reverse mortgage means that borrowers can never owe more than their home’s value at the time the loan matures.  But what does this mean for consumers, and how does it protect them? Let’s explore an example of how this essential feature works.

ARLO teaching reverse mortgages and non-recourse

An Example of Non-Recourse Protection

Imagine a 66-year-old homeowner with a $500,000 home qualifies for $321,000 in available funds on a Fixed-Rate Reverse Mortgage product based on current parameters.

Over the life of the reverse mortgage, the homeowner’s balance will increase. After 20 years of interest accrual and enjoying a payment-free lifestyle, the balance could exceed $1,000,000.

During that time, the home’s value may have appreciated, remained the same, or decreased due to a downturn in the real estate market. Regardless of market conditions, the Non-Recourse feature ensures that the maximum amount owed on the reverse mortgage at maturity—for instance, after 20 years—is capped at the home’s appraised value.

If the home appraises for $1,000,000 or more, the heirs can either:

  • Sell the property to pay off the reverse mortgage and keep any remaining proceeds as inheritance.
  • Refinance the loan to pay off the balance and retain the property.

In a worst-case scenario, if the home is worth only $500,000 when the borrower passes away, the heirs have the following options:

  1. Sell the property.
  2. Refinance the loan.
  3. Walk away from the property, leaving it to the lender.

In any case, the maximum repayment is limited to $500,000, and the lender cannot pursue the estate or heirs for the difference between the balance and the property’s value. HUD guarantees the lender’s loss through the reverse mortgage program’s federal insurance.

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Amortization Example of Interest Owed

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HUD’s Mortgagee Letter 2008-38 clarified and initially changed the implementation of the Non-Recourse feature.  However, this led to controversy and a lawsuit from AARP.

The AARP Lawsuit and HUD Policy Changes

Before Mortgagee Letter 2008-38, the Non-Recourse feature applied to all maturity events on reverse mortgages.  Borrowers or heirs were protected regardless of whether they sold the property or refinanced the loan.   The maximum amount owed was always capped at the home’s appraised value at the time of maturity.

However, the 2008 policy restricted this protection to bona fide sale transactions, preventing heirs from refinancing or paying off the loan at the home’s appraised value. For example, if the home appraised at $500,000 but the balance was $600,000, heirs would need to repay the full $600,000 to keep the property.

AARP filed a lawsuit against HUD to restore the original interpretation of the Non-Recourse feature. In response, HUD issued Mortgagee Letter 2011-16, rescinding the 2008 policy and reinstating the original protections.

Why Non-Recourse Protections Matter

The Non-Recourse feature is a cornerstone of federally insured reverse mortgages, offering peace of mind to borrowers and their heirs. Borrowers are never personally obligated to repay more than their home’s value. The home itself serves as the sole collateral, ensuring:

  • Financial Security: Borrowers can enjoy their retirement without worrying about accruing unmanageable debt.
  • Heir Protections: Heirs are shielded from financial liability beyond the property’s appraised value.
  • Consumer Confidence: The federal insurance backing guarantees lenders’ losses, reinforcing the program’s stability.

Top FAQs

Q.

What Happens If the Reverse Mortgage Balance Exceeds the Property Value?

If your reverse mortgage balance surpasses the value of your property, it doesn’t impact your loan status.  As long as you continue living in the home and meet your obligations, such as maintaining taxes, insurance, and property upkeep, your loan remains in good standing. Additionally, any available funds in your line of credit can still be accessed.

If the last surviving borrower leaves the home permanently and the loan balance exceeds the property value, the estate is not responsible for the shortfall.  Thanks to the loan’s non-recourse feature, you or your heirs can never owe more than the property’s value at the time of sale.

For Home Equity Conversion Mortgages (HECMs), the Federal Housing Administration (FHA) Mortgage Insurance Fund covers any losses to the lender, ensuring no additional burden on the borrower or their heirs.

Q.

What Happens If I Live Beyond 100 Years Old?

Reaching 100 years of age or older has no impact on your reverse mortgage.  Many people ask about this due to the actuarial tables for life expectancy and loan-to-value ratios, which stop at age 99.  However, your reverse mortgage remains valid as long as you continue to:

  • Occupy the property as your primary residence.
  • Pay property taxes and homeowners insurance on time.
  • Maintain the home in good condition.

As long as these requirements are met, your reverse mortgage loan will stay in good standing, regardless of your age.

Q.

If I Borrow Too Much, Can the Bank or Servicer Go After My Heirs or Other Assets?

No, this cannot happen. A reverse mortgage is a non-recourse loan, meaning you can never borrow “too much.”  The lender’s only security for repayment is the home itself.  They cannot pursue your heirs or your estate for additional funds, regardless of the loan balance.

This protection ensures peace of mind for borrowers and their families.  The maximum repayment is capped at the value of the home when it is sold, with any shortfall covered by mortgage insurance in the case of federally insured reverse mortgages.

Q.

How Do You Get Out of a Reverse Mortgage That Is Upside Down?

If your reverse mortgage balance exceeds your home’s value, there’s no need to leave the home voluntarily. You can continue living there as long as you meet the loan’s requirements, such as maintaining it as your primary residence and keeping up with taxes and insurance.

When you eventually vacate the home—whether due to moving into assisted living or other reasons—you must notify the lender. At that point:

  • If your heirs want to keep the property: They can pay off the loan at 95% of the home’s current appraised value, regardless of the loan balance.
  • If your heirs don’t want the property: They can allow the lender to foreclose, or you can deed the home back to the bank if the title is clear.

In either scenario, the reverse mortgage’s non-recourse feature ensures that no additional repayment can be sought from your heirs or other assets. The home itself is the only collateral for the loan.

Q.

If I Do a Deed in Lieu of Foreclosure on a Reverse Mortgage, Will It Ruin My Credit?

In most cases, a Deed in Lieu of Foreclosure on a reverse mortgage does not impact your credit.  Lenders typically do not report reverse mortgages to credit bureaus, and these transactions often occur at the end of the loan when borrowers transition to assisted living or other care, making credit less relevant.

However, if you choose a Deed in Lieu of Foreclosure early—simply because you no longer wish to stay in your current home—and later apply for financing on another property, the impact on your credit may vary.  Future lenders might consider this decision differently, as there is no standardized way they evaluate such scenarios.  It’s advisable to consult a financial advisor or lender for guidance if you’re concerned about potential future financing needs.

Have Questions About Non-Recourse Protections?

All Reverse Mortgage, Inc. (ARLO™) is here to help.

Let us assist you in making informed decisions about your financial future!

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