Compared to a regular home mortgage, the Home Equity Conversion Mortgage (HECM) is a much different financial tool. While each loan offers distinct benefits depending on the situation, they both require post-closing responsibilities that borrowers must maintain in order to prevent default. Read on to gain a better understanding of the typical duties you will need to fulfill for either type of loan.
Traditional Mortgage Obligations
With regular home mortgages, borrowers are typically expected to meet monthly payments for many years as they work to slowly buy their home over time. Rather than pay for the entire home or property with one lump sum, the debt is paid over time with the inclusion of interest. In order to meet your mortgage obligations, you simply need to pay the bill on time and follow any other specific rules that your bank/lender may require. You will also need to stay current on your homeowners insurance and property taxes, and you will need to maintain your home.
If you do end up finding yourself in a potential default situation, get moving to find a solution as soon as possible. In many cases, being polite with your lender and informing them of your financial situation may convince them to make accommodations that will help you to reach your deadline. For example, if you find yourself in a rough situation, your lender may be willing to offer you a repayment plan that should provide some breathing room.
Home Equity Conversion Mortgage (HECM) Responsibilities
The biggest difference between HECMs and regular mortgages is that HECMs do not require monthly payments. Getting a reverse mortgage will even eliminate your existing mortgage if you have one. However, like a traditional mortgage, you are still responsible for paying homeowners insurance, property taxes, and home maintenance costs, which we will discuss later. So, if reverse mortgages don’t require monthly payments, what do they require?
- Occupancy – One of the essential conditions of maintaining a reverse mortgage is the requirement that at least one of the borrowers must live in the property as a primary residence. As such, borrowers have an obligation to certify their occupancy at least once per year in writing. To satisfy this obligation, your loan servicer will send you an Annual Occupancy Certification that you must sign in order to indicate that you continue to reside in the property. If this certification is not received, your servicer will be required to issue an inspection of the property. This could possibly escalate into further problems if it cannot be determined that at least one borrower is living at the home. If you ever have to leave your home for an extended period of time (such as for a medical issue or a long vacation) you should contact your servicer in advance and let them know when you will likely return. Also, be aware that if the last remaining borrower fails to occupy the property for more than half of the year each year (even in the case of illness), HUD will require the servicer to call the loan due and payable.
- Property Taxes – Paying your property taxes is another essential post-closing responsibility that you should be mindful of. To make sure that these taxes are properly paid, your servicer will check in with a national tax reporting vendor to verify that this obligation has been fulfilled. If it seems likely that you will not be able to pay your property taxes by the time they come due, check in with your servicer in advance to see if a solution can be found. When these taxes are not paid on time, this may constitute grounds for default and the loan will come due and payable.
- Property Insurance – Another essential responsibility that comes with a reverse mortgage is to maintain your existing levels of property insurance. Depending on the specific details of your property and your location, you may be required to maintain hazard insurance (such as flood insurance) as well as other forms of insurance as specified by your servicer. As with the other obligations, make sure to provide your servicer with evidence of coverage. Each year, your Servicer will also receive information from your insurance company – if you switch to a different insurance company, be sure to notify your servicer of this change. If, for any reason your home is damaged, contact your insurance company immediately to file a claim and don’t forget to inform your servicer as repairs are conducted.
- Homeowner’s Dues – If applicable, reverse mortgage borrowers must also pay homeowner’s dues. This includes ground rents and other property assessments. Like many of the other obligations discussed previously, it is essential to make these payments in a timely fashion. Be aware that if your Servicer has to pay any of these property assessments on your behalf, you will not be able to work out a delayed repayment plan in accordance with HUD guidelines. Payments will have to be made immediately or else the loan will come due and payable.
- Property Maintenance – Because, in many cases, the loan is repaid with the sale of the home, it is important to maintain the property. Some people use a portion of their proceeds to make home improvements, so, if you need to fix the roof or broken window, consider using some of your reverse mortgage funds.