CONSUMER SAFEGUARDS - ASSURANCE
Your most carefree years should be your retirement years It is possible to achieve this with a reverse mortgage. To help senior borrowers with a reverse mortgage, reverse mortgage safeguards were built into the loan by HUD, a part of the executive branch of the United States federal government. In my opinion, these essential safeguards make the reverse mortgage one of the safest loan products in the lending industry.
Capped Interest Rates.
The interest rate caps with the HECM ARM are the same no matter which lender a senior chooses as they are set by HUD. The 1 YR CMT rate which is what the HECM ARM is based on is published weekly by the Federal Reserve. Annually adjustable interest rates cannot vary by more than 2 percentage points per year, or 5 points over the life of the loan. These limits are called "periodic" and "lifetime" caps.
Limitation on Ouf-of-Pocket Fees. Origination fees are set by HUD regulations and are financed as part of the Reverse Mortgage. This means a senior incurs very little out-of-pocket expense to obtain a reverse mortgage.
No Maturity Date.
A reverse mortgage cannot become due during the homeowner’s lifetime. This is because the term of the loan is actually set to 150 years. The fact that there are no required payments (and there is a lifetime right to occupy the property as your primary residence) gives borrowers peace of mind.
No Prepayment Penalty.
Although the loan is not due and payable until the borrower permanently moves out of the home whether by selling the home, passing away, or leaving the premises longer than 12 consecutive months, the reverse mortgage can be paid off at any point with no fees or costs as there if no pre-payment penalty.
Asset Protection.
The HECM is a “non-recourse” loan. This means that the amount due can never exceed the value of the home. When the loan becomes due (whether by the borrowers passing away, refinancing, or the heirs selling/buying the home), the lender is repaid the sum of funds advanced plus accrued interest and any fees. If there is remaining equity in the home, this belongs to the homeowner or their estate. The lender cannot look to any other asset but the home for repayment of the debt which is the collateral for the reverse mortgage.
FHA mortgage insurance. FHA mortgage insurance ensures that you will never owe more than your home is worth. This is because of a feature called non-recourse which was previously mentioned. Lenders can only recoup shortages or be made whole by putting in a claim to the FHA through mortgage insurance which is a feature of the reverse mortgage. Nothing other than the home (which was the collateral for the loan) can be attached. Bank accounts, retirement funds, and other assets cannot be used to satisfy the loan. The house stands for the debt.
In the documents you sign at your reverse mortgage closing called the Note, the Mortgage, and the Loan Agreement, there is a section called NO DEFICIENCY JUDGMENTS contained in the Uniform Covenants section of the MORTGAGE. This means that if there is a deficiency in paying back the debt to the lender (such as homes under water), the lender cannot recoup any of their losses from you personally but will instead use the FHA mortgage insurance to recoup their loss. FHA mortgage insurance protects you but also protects the lender.
"NO DEFICIENCY JUDGMENTS: "Uniform Covenants, 11: No Deficiency Judgments. Borrower shall have no personal liability for payment of the debt secured by this security instrument. Lender may enforce the debt only through sale of the Property. Lender shall not be permitted to obtain a deficiency judgment against Borrower if the Security Instrument is foreclosed."
