Using a Reverse Mortgage to Pay your Real Estate
Taxes and Homeowners Insurance
A few years ago the Department of Housing and Urban Development (HUD), which regulates reverse mortgages, issued new guidelines that sought to address a growing concern regarding reverse mortgages. The issue at hand was an increase in the number of reverse mortgage borrowers that were defaulting on their mortgages because they were not paying their real estate taxes and/or their homeowners insurance. As with all mortgages, reverse mortgage borrowers are still required to pay their real estate taxes and to keep their home insured. Unfortunately, as much as eight percent of reverse mortgage borrowers were behind on their real estate taxes and/or their homeowners insurance. After careful analysis it became apparent that something needed to be changed in the regulations to prevent such high default rates.
The changes in the regulations were substantial. Before the changes in the regulations there were a limited amount of guidelines with regards to the ability of the borrower to pay for taxes and insurance. Now there are strict requirements that are in place in order to ensure that the borrower can afford the taxes and insurance on their homes. Depending on the profile of the borrower, they may be required to “set aside” enough equity to pay for their taxes and insurance.
Here is how it works. If the borrower has been late on their taxes and/or insurance within the past 24 months they are required to do what is called a Life Expectancy Set Aside (LESA). With a LESA enough equity in the property is “set aside” to pay for taxes and insurance for the rest of the borrower’s life expectancy. There is no need for the borrower to worry about paying their taxes and insurance as the lender will send the taxes to the local municipality and the insurance payments to the insurance company right from the equity in the property. Of course if the borrower has enough income and if they have not been late on their taxes in the past 24 months they are not required to have a set aside, but some borrowers choose to do so for financial and convenience reasons.
I am currently working with a client in western Massachusetts that is going to be required to have a Life Expectancy Set Aside. This is his situation. He is 69 years old and he is living on Social security/disability income. He ran out of his savings a couple of years ago and has since fallen behind on his taxes in the amount of $12,000 and he has not had homeowners insurance for a couple of years. He owns his home outright and the home has been appraised for $250,000. In his reverse mortgage scenario, he qualifies for a mortgage that will allow him to have access to approximately $143,000. Because he has been late paying his taxes and because he has not had homeowners insurance on the property he will have to “set aside” $68,000 of the $143,000 in order for his taxes and insurance to be paid. When we close the loan the back taxes that have not been paid will also be paid out of the proceeds of the reverse mortgage. This loan works perfect for him as we are going to be able to catch up with the back taxes and moving forward he will not have to worry about his real estate tax payments or having his home insured for the rest of his life expectancy. He also plans on using some of the remaining money from the reverse mortgage to do some home improvements.
In summary, HUD did a great job addressing a real problem that many people are facing as real estate taxes and homeowners insurance payments have continued to increase while there income remains fixed and in many cases there savings have dwindled. This is truly a case of “Using your Home to Stay at Home”!
Dan Collins is a Reverse Mortgage Specialist (NMLS # 30130) with Continental Funding Corporation (NMLS # 2723) He has been specializing in Reverse Mortgages for over 10 years. He has also been featured on the FreeMoneyRadio program and can be reached at 9782398446 or [email protected].
For a free copy of The National Council on Aging’s booklet titled “Using Your Home to Stay at Home” feel free to contact Dan at the information provided above and he will get a copy in the mail to you right away. This booklet contains excellent information about a wide variety of options to help senior citizens remain in their homes after they retire.