Borrowers are often confused when they get to the point where they are ready to sign their final documents for their reverse mortgage loan and they are presented with a First and Second Trust Deed Note and also Two Deeds of Trust (or mortgage, depending on what state in which the property is located).
Then to make matters worse, the amount on the Note and Deed of Trust is far higher than the amount they have agreed to borrow. Some borrowers have refused to sign the documents at closing due to the fact that they were never informed about the multiple document situation, the different amount, and quite simply don’t understand it.
This can really complicate things on purchase transactions when borrowers and sellers both are ready to close on a transaction and borrowers feel panicked if they are not prepared.
The answer and full explanation can be found right on the HUD website.
When reading the manual on reverse mortgages, HUD explains that every reverse mortgage shall have both a First and Second Note and while the borrower does not have to receive a copy of the Second Note prior to closing, its existence and relationship should be fully explained to the borrower (and thus this explanation to you).
The Second Note is not a separate loan encumbering the property as is the case with a traditional first and second loan but rather secures any payments made to the borrower by HUD on their reverse mortgage.
It “picks up” if you will where the payments made to the borrower or on the borrower’s behalf by the lender left off and those made by HUD start up.
HUD Uses Second Note For Your Protection
HUD can step into a reverse mortgage in a couple instances and may advance funds on the part of the borrower. If the lender becomes unable to make payments due to the borrower under the Loan Agreement, then HUD would step in and make certain that the borrower is paid.
In the case of a lender who becomes insolvent when borrowers are depending on their reverse mortgage funds, HUD steps in and pays those funds to borrowers. This is one of the reasons why reverse mortgages have insurance.
HUD requires lenders to assign loans to them when the Loan to Value reaches 95%. From this point on, HUD would be making all future advances to the borrowers and may have to advance funds for taxes or insurance at times.
The second Note and Deed of Trust makes certain that HUD’s position is covered under these circumstances which allows them to continue to make any necessary advances to borrowers that, without the security they could not make.
How the Recorded Amount is Calculated
Next is the issue of the loan amount listed on the documents. HUD does not require a maximum mortgage amount to be stated on the mortgage due to the fact that no payments are required, many reverse mortgages have growth features in the lines available and the balance owed increases as borrowers make no payments.
However, most states do require an amount to be stated on the documents which leads to HUD’s dilemma. They cannot simply state the beginning balance as is the case with a normally amortizing loan or one where a borrower’s borrowing power may increase with a growth rate on the line of credit or no amounts higher than this balance could be advanced to or on behalf of the borrower.
In cases such as tenure loans (payments for life) where borrowers continue to live in the home longer than the anticipated time frame, this would cause an abrupt stoppage of the payments and the this would not be good for borrowers who depended on those monthly payments to live.
Also, as is the case with the line of credit that grows over time on the unused portion, HUD states that a maximum amount stated as the beginning balance would prevent borrowers from using the growth balance of the line.
For this reason, the amount that you will see on the Note and Deed (or Mortgage) will equal 150% of the Maximum Claim Amount, that is, the full value of the property or the HECM Lending Limit, whichever is less.
For example, if you home is worth $200,000, then the amount on the Deed would be $300,000. If your home is worth $800,000, the amount on the Deed would currently be $1,200,000 or 150% of the current lending limit of $970,800 and this would be the same amount recorded for any property valued at $970,800 or above.
It’s important to note that you only owe the money you borrow plus any accrued interest, insurance and fees.
This is the same concept as a Home Equity Line of Credit (HELOC) now. When you close the loan, you sign documents for the entire amount but you only have to repay the amount you borrow plus interest on that amount, not the entire line if you don’t use it all.
The big difference is that with the reverse mortgage there is an additional Note and Deed in case HUD has to advance funds as well.
But it’s still the same – you only repay what you borrow plus the fees and interest that you financed (and any funds that the lender or HUD have to advance on your behalf such as taxes, insurance, etc. if those are not paid in a timely manner).
So these are the things you need to know about reverse mortgage documents before it’s time to sign:
- There will be 2 Notes and 2 Deeds of Trust (or Mortgages).
- They do not secure a First and Second Lien, the second Note and Deed only secure any advances that HUD may have to make to you after the lender stops and HUD begins.
- The loan amount on the documents will either be blank, total 150% of your property value or 150% of the HUD Lending Limit, whichever is less, depending on the state in which you live and their laws affecting the mortgage documents but if an amount is stated, it will be higher than the amount of cash you are receiving at the close.
Regardless of the amount stated on the loan documents, just like HELOC documents, you only owe what you borrow plus applicable interest, mortgage insurance and financed fees plus any amounts the lender or HUD have to advance on your behalf.
You will receive a sample copy of the Note, the Deed of Trust or Mortgage and Security Agreement in your loan package. If you have any questions please do not hesitate to ask so that you are not surprised at your closing,
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