Paying your property charges on time is an important homeownership obligation. FHA requires reverse mortgage borrowers to keep their property charges current to remain in good standing with their reverse mortgage. Borrowers who fail in this obligation risk triggering a maturity event, which can make their loan balance due and payable in full.
A growing default problem
Defaults due to nonpayment of property charges were a growing problem during the first two decades of the HECM program. The result was bad headlines for the HECM and losses for the FHA Mutual Mortgage Insurance Fund (MMIF), which insures HECMs. The long-term financial viability of the MMIF is key to the long-term viability of the HECM, so FHA decided to implement some changes to address the default problem.
Today, reverse mortgage lenders are required to more extensively analyze an applicant’s credit history and income in a process called financial assessment. The intent of financial assessment is to reduce defaults by ensuring that reverse mortgage borrowers have adequate financial resources (based on income) and have demonstrated a financial willingness (based on credit) to keep up with their financial obligations.
HECM applicants that fail financial assessment can still be approved by documenting certain extenuating circumstances, compensating factors, and/or opting for a life expectancy set aside (LESA). A LESA is designed to ensure that the property charges are paid for borrowers with limited income and/or shaky credit histories. The lender simply sets aside a portion of the proceeds and uses them to pay the required property-related expenses for the rest of the estimated life span of the youngest borrower or non-borrowing spouse.
FHA now also requires lenders to evaluate your property charge payment history. Your lender may require a LESA if you have late payments on your property charges, unless you can document an extenuating circumstance that led directly to the late payments.
Definition of property charges
So what exactly does the term “property charges” include? According to FHA’s HECM lending guide, property charges include the following:
- All property taxes, including school, city, county, state, etc. Taxes that have been permanently waived or exempted from payment and don’t accrue interest or result in a lien against the property are excluded from this definition. If you are exempt from property taxes, your lender will need proof of the exemption to complete your loan.
- Homeowner’s/hazard insurance
- Flood insurance
- Homeowner’s association (HOA), condominium, and planned unit development (PUD) fees
- Ground rents
Property charges can also include any other assessments levied by municipalities under state law, such as special assessments or mello-roos.
