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Every reverse mortgage in the U.S. is a non-recourse loan. That means that neither the homeowner nor their heirs will owe more than the value of the home at the time the loan is due. This removes a significant risk that is often associated with homeownership and is a primary consumer protection that makes reverse mortgages so attractive.
Can a reverse mortgage really guarantee this?
Yes, it’s true. The homeowner is not responsible for the portion of a loan balance that accrues beyond the home’s value. In fact, the home stands for the debt, NOT the homeowner.
Many understand this to mean that the bank takes the home. That’s not correct. The homeowner retains title to the home through the life of the loan and can sell it at any time with no prepayment penalty. The non-recourse feature is simply there to protect the homeowner and the lender from what is known as “crossover” loss, that point where the sale of the home is not sufficient to pay off the loan balance.
So, who pays for non-recourse losses?
Before you say this is too good to be true, this is why FHA collects mortgage insurance premiums. FHA’s Mutual Mortgage Insurance Fund (MMIF) is a collection of funds created specifically for this purpose. Lenders pay the insurance premiums on the first of every month and then add that amount to the borrower’s loan balance. Essentially, borrowers pay for the non-recourse protection indirectly through the insurance premiums that accrue on their balances.
The non-recourse feature may also allow the heirs to obtain the home for less than market value. After the last borrower has died, the non-recourse feature allows the heirs to obtain the property for either 95% of the home’s value or the loan balance, whichever is LOWER. And again, there is no recourse to the estate for this.