Who pays property taxes and insurance on a reverse mortgage?
And then, instead of an automatic declination if your income or credit does not meet the requirements like a typical loan, then there is a second opportunity with a Life Expectancy Set Aside (LESA) wherein the funds are set aside to pay the taxes and insurance from the loan proceeds and you can still get the loan.
Now, before you think that a LESA is a really bad thing, let me explain it a bit further and then you might see why a number of borrower actually request it after they get all the facts.
The funds that are set aside do limit the amount of money available to you by that much to use for other purposes, that is true.
So if you planned on using every bit of your reverse mortgage for other purposes and you need the LESA to qualify, then the loan may not be for you with that requirement.
But if you were going to use the funds for living expenses anyway, this enables you to truly eliminate all household expenses (with the exception of your utilities and maintenance).
Because the lender would take over the payment of your taxes and property insurance, you no longer have a mortgage payment, property tax payment or insurance payments to pay.
The funds are not considered borrowed until the lender actually uses them to pay your payments.
So only those funds that are used to pay that installment of taxes or insurance are added to the balance and the other LESA funds remaining are not funds you have borrowed yet and you do not accrue interest on funds you have not borrowed.
There is no fee to have your taxes and insurance paid for you and they are paid on time for as long as you own your home (at some point in time servicing fees may reappear on loans with LESA’s but that is not the case at this time).
The bottom line is that you don’t have to have a LESA if you meet the income and credit criteria of the program but if not, take a good look at the program with it, you might find out that it still meets your desired goals (and you might actually like it).
Top 5 FAQs on Reverse Mortgages & Property Taxes
Do you have to pay property taxes on a reverse mortgage?
Borrowers always own their homes and they are responsible for the timely payment of taxes and insurance. Failure to pay the taxes and insurance in a timely manner is a default under the terms of the loan and can lead to a foreclosure.
Can I claim a property tax deduction if I have a reverse mortgage?
A reverse mortgage does not affect the taxes you claim for property taxes paid. You will still be paying property taxes and they will be treated the same as before you obtained your reverse mortgage.
Is there a reverse mortgage option that pays the property taxes and insurance?
You can voluntarily set up an account to pay your taxes and insurance for life using loan proceeds to pay the expenses. You do not accrue interest on this portion of your loan until the lender actually sends the money in to pay for the expense and if you sell or refinance the loan before these funds are used, the unused portion of the account funds were never borrowed and so they are not included in the amount needed to repay your loan. You must remember though that once you set funds aside, you cannot change you mind later.
Can you get a reverse mortgage if you owe back property taxes?
All taxes must be brought current at the time of the loan and if you have been late on property taxes, mortgage payments or any other property charges in the past 24 months (i.e. HOA dues), the lender will require a Life Expectancy Set Aside per HUD guidelines to pay these expenses from your loan proceeds.
Can you do a reverse mortgage and then go into property tax deferral? HUD requires that all property charges be paid when due. They do not allow deferral programs. If you qualify for an exemption, that is perfectly fine but if it is a situation where amounts owed build up from non-payment, that is a violation of the reverse mortgage agreement.