It’s easy to understand why so many people mistakenly believe the lender takes ownership of the home in exchange for giving the borrower a reverse mortgage. The loan’s many advantages make it seem almost too good to be true. Some of these advantages are:
- The lender pays off the borrower’s current mortgage, if one still exists.
- The lender pays out the remaining reverse mortgage loan proceeds, after the current mortgage is paid, in one of six different payout plans of the borrower’s choice.
- The lender allows the borrower to live in their home for the rest of their life without monthly mortgage payments (as long as the borrower complies with all the loan terms such as continuing to maintain their home and paying the property taxes and homeowners insurance).
But, in fact, all the features listed above are true. There is no catch. Indeed, just as with a traditional mortgage, a reverse mortgage does not require the borrower to surrender title or ownership of the home just because there is a lien on the property.
The myth that the bank owns the home may stem from the possibility that the lender could own the home if the borrower fails to comply with the loan terms, such as the failure to maintain the home or pay property taxes and homeowners insurance. But, these conditions are the same for borrowers who purchase their home with a traditional mortgage.
What really happens
There may be another factor propelling the misconception that the bank owns the house in a reverse mortgage. This has to do with how the reverse mortgage is repaid. At first blush, many people assume the reverse mortgage lender takes possession of the home as repayment for the loan. But in reality, a borrower has options.
Even though the borrower is obligated to repay the loan (including interest and fees) immediately when they move out or sell the home, the borrower retains any remaining equity after the loan is repaid. For the most popular type of reverse mortgage called a HECM, if the loan is underwater (loan is greater than the value of the home), HUD will make up any shortfall to satisfy the lender.
If the borrower passes away, the heirs are given several options for repaying the loan. They can keep the home and pay off the loan balance (with their own funds or through a refinance) or they can sell the home and pay off the loan balance, keeping the excess equity. Only if there is no remaining equity in the house would the heirs just walk away from the home or deed the house to the lender (deed-in-lieu of foreclosure). The point is that the borrower or the heirs have options. The bank does not automatically get the house.
For both the borrower or the heirs, if the value of the property is insufficient to repay the entire loan, they can never be forced to pay any additional money. In other words, the lender has no recourse for attaching any of their assets to recoup any shortfall, which is why a reverse mortgage is known as a “non-recourse” loan.
However, if the loan is not timely repaid, the lender would have the right to foreclose per the loan agreement and then sell the home to repay the loan. Of course, this is no different from how a traditional mortgage is treated.
In conclusion, reverse mortgage lenders are not in the homeownership business. They are in the lending business. Their financing doesn’t require borrowers to hand over title or ownership of their properties for the loans they make. Only if the borrower fails to comply with the terms of the loan agreement would the lender consider initiating the foreclosure process, which could result in the borrower losing homeownership.
Does the bank own the house in a reverse mortgage?
No, under normal circumstances you retain title to the home. Just like any other mortgage, the lender holds the lien while the homeowner holds the title.
If my home is sold to pay the loan balance, what happens to any leftover equity?
Any and all equity remaining after the loan balance is paid (including interests and fees) becomes available to the borrower or to the borrower’s heirs.
If my heirs or I sell the home to pay off the loan, but the sales proceeds are insufficient to cover the balance, what happens then?
The most common reverse mortgage is a Home Equity Conversion Mortgage, which includes FHA Insurance (required by HUD, but you can finance your annual insurance premium as part of your loan). And this insurance will cover any shortfall – meaning – you or your heirs would never be responsible for paying a loan sum that is greater than the appraised value of the home.