So you have identified a property to buy and have struck a deal to purchase with the person who is handling the estate for the owner of record. At the kitchen table the seller indicated there is only one loan on the property and gave you an estimated balance. Once you receive the title commitment it shows two liens and they appear to be for the same amount. Is this a mistake? When you speak to the title company they inform you that this appears to be a reverse mortgage. What is a reverse mortgage and why would this be a red flag to you?
A reverse Mortgage is a loan that is available to seniors who are at least 62 years of age. The loan is not required to be repaid until the last Surviving borrower moves out or passes away. In the scenario listed above let’s assume they have passed away. The estate has 6 months to repay the balance or sell the home. The estate would then have the ability to retain the balance of the equity in the property. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from FHA as the estate is not personally liable if the home sells for less than the balance owed.
This is why you see two liens on the property. The Federal Housing Administration has many guidelines to meet to obtain this unique loan. The lien securing the terms of FHA is recorded and the HECM (Home Equity Conversion Mortgage) for the equity draws. The owner does not make payment and does not typically have to have any kind of credit requirements to obtain this loan. They receive month payments calculated by a formula determined by the FHA guidelines to use for their living expenses or whatever they see fit. The home owner must keep their insurance and taxes up to date as there is not an escrow account associated with this type of loan.
So the question goes back to, why do I care? Sometimes the person in charge of the estate does not realize the implication of this loan. If their parent takes out this type of loan and dose not explain exactly what this all means they could be inadvertently giving you bad information about what is owed. You could have a dead deal once you receive the payoff especially if the loan was taken out prior to the year 2000. Remember the loan has no payments yet the client is receiving payments from their equity. Due diligence is very important for many different reasons and this is just one. If you are interested in a property check the title BEFORE you negotiate your contract or you could end up wasting a lot of your precious time… and time is money. Please be sure to consult with you Lender partner to see how any of this may affect your particular transactions. This is a fake scenario made up to help you understand the importance of researching the specifics of any property you are negotiating a deal on and not to be relied upon as fact to any deal you are currently working on.
By Jill Bright