A HECM reverse mortgage is a non-recourse loan, which means the only asset that can be claimed to repay the loan is your home. If your home isn’t worth enough to pay off the entire balance, you’re not on the hook for the shortage. Any shortage is paid off by the FHA mutual mortgage insurance fund.
This non-recourse feature makes the HECM unique among residential home loans. Most residential mortgages, whether conventional, FHA, or VA, are full recourse loans. If you have a full recourse loan and your home’s value falls and isn’t worth enough to pay off your entire mortgage balance, you’re on the hook for the shortage. If you want to sell your home, you have to either pay the shortage out of pocket or negotiate a short sale (which usually comes with a big tax bill).
A HECM reverse mortgage doesn’t come with this problem; it’s a non-recourse loan. You’re not on the hook for the shortage if you owe more than your home is worth.
How a HECM can be non-recourse
The FHA mutual mortgage insurance fund (MMIF) is what makes it possible for the HECM to be non-recourse. Without the backing of the MMIF, it would likely be difficult for lenders to offer HECMs with the non-recourse feature at attractive interest rates.
The MMIF is very important for traditional “forward” FHA and HECM lending. Borrowers of both traditional FHA loans and HECM reverse mortgages pay a one-time mortgage insurance premium into the fund at loan closing (called IMIP in the case of the HECM). This fee is either paid out of pocket or rolled into the starting loan amount.
Borrowers also pay ongoing mortgage insurance premiums (called annual MIP in the case of the HECM). Traditional FHA borrowers pay the annual premiums as part of their monthly mortgage payment. HECM borrowers aren’t required to make mortgage payments (as long as program obligations are met, including the payment of property charges), so the annual fee is added to the loan balance over time.
The funds in the MMIF are used to protect lenders against loss in the following instances:
- A traditional “forward” FHA mortgage borrower defaults and the home is foreclosed at a loss to the lender.
- A reverse mortgage is settled up due to a maturity event and the home isn’t worth enough to pay off the entire loan balance. The MMIF funds are used to settle up the shortage so the borrower doesn’t have to.
The MMIF is fully backed by the United States Treasury, so it technically can never run out of money. The only time the fund has needed a cash injection was in 2013 when it ran short due to the ongoing fallout from the financial crisis.
Is a reverse mortgage “risky”?
It’s puzzling that many people still insist that HECM reverse mortgages are risky. How are they risky? No mortgage payments are required and the loan is non-recourse.
If you have a traditional “forward” mortgage, you’d better make your monthly payment or you lose your home. And if home values fall and you owe more than the home is worth, you’re on the hook for the shortage.
A reverse mortgage isn’t perfect for everybody, but it’s a great program for the right candidate. And it’s far less risky than a traditional mortgage for most seniors.