Property charges

HECM Reverse Mortgage Property ChargesHECM reverse mortgage borrowers are required to required property charges current to remain in good standing with the HECM program. Required property charges most commonly include property taxes, homeowner’s insurance, flood insurance, HOA dues, ground rents, and special assessments, where applicable.

Paying required property-related expenses is a key requirement of the reverse mortgage program. As long as at least one borrower (or non-borrowing spouse) is living in the home and paying the required property charges, no mortgage payments are required.

If a borrower fails to keep up with the property charges, they risk triggering a maturity event that will make the HECM balance due and payable in full.

Nonpayment of property charges led to growing default problem

Defaults due to nonpayment of property taxes, insurance, etc., 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 make a change. To address the problem, tighter lending guidelines were implemented in 2014.

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 making sure reverse mortgage borrowers have adequate financial resources (based on income) and demonstrate a financial willingness (based on credit) to maintain 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.