If you are doing research about reverse mortgages you probably have come across the term non-recourse loan. A reverse mortgage is actually a non-recourse loan. What exactly does non-recourse loan mean? Here is what you should know about reverse mortgages and the term non-recourse.
Most reverse mortgages are insured by the Federal Housing Administration (FHA). An FHA insured reverse mortgage is commonly known as a Home Equity Conversion Mortgage or HECM, pronounced heck-um.
An FHA-insured HECM loan is a non-recourse loan. That means that the FHA adsorbs the remaining balance of the loan if the sale of the home does not cover the balance of the loan. This means that when your home is sold to repay the loan, neither you nor your heirs/children will be required to pay more than the sales price of the home.
So a recourse loan would mean the opposite. A loan that is recourse mean that’s in the event of a default by the borrower the lender has to foreclose on the property, selling the property for less than the original loan amount. The lender can then go after the borrower for the difference.
But a reverse mortgage is not a recourse loan, it is a non-recourse loan. So when the property is sold and if the sale of the home doesn’t cover the balance of the loan the borrower or the heirs to property are not responsible for the difference of the loan. The FHA actually covers the difference of the loan. Remember with the reverse mortgage your heirs have three options with your reverse mortgage.
Option 1: Your heirs can sell the property – If your heirs choose to sell the property and the proceeds exceed the value of the home, they can keep the difference. For cases where the proceeds from the sale of the home are insufficient to pay off the loan, then the Department of Housing and Urban Development (HUD) absorbs the difference as long as it is an FHA insured loan. If it is not an FHA insured loan the difference would be covered by the lender. In either case the heirs are not responsible.
Option 2: Your heirs can keep the home – If your heirs choose to keep the home they will have to refinance 95 percent of the home’s value or the balance of the loan, whichever is lower.
Option 3: Your heirs do not have to be responsible for the home – What is great about the reverse mortgage is your heirs do not have to be responsible for the home. If your heirs do not want anything to do with your home after you are no longer living in the home then they will not be responsible for payment of any kind.
A reverse mortgages insured by the FHA are non-recourse loans. This is a good thing for borrowers of the program because it means that when the home is sold and it does not cover the balance of the loan the borrower nor the heirs will be responsible.
Still have questions? Give us a call. A One Reverse Mortgage licensed expert can talk with you about your financial goals to see if a reverse mortgage works for your financial goals.