The proper definition of the non-recourse feature is “FHA guarantees that the borrower will not owe more than the home is worth at the time it is sold.” This should be comforting to every homeowner and their heirs. They can be assured that if a homeowner lives a very long time, or if property values drop, FHA will pay a claim to the lender so that nobody is harmed by the loan being “upside down” or “under water”.
– Understanding Reverse – Page 27
This is a primary consumer protection that makes HECMs so attractive. What’s not to love about this provision? It is a tremendous advantage for older homeowners that removes much of the risk associated with homeownership. Because many are skeptical about this claim, I often get asked to prove the non-recourse feature really exists. So the book, Understanding Reverse, documents the federal regulations and relevant handbooks that give us guidance.
Can a Reverse Mortgage really guarantee this?
Yes. The homeowner is not responsible for the portion of a loan balance that accrues beyond the home’s value. Another common explanation is:
“THE HOME STANDS FOR THE DEBT”… NOT the homeowner
Unfortunately, many understand this phrase to mean that the bank takes the home. No. The homeowner retains title to the home through the life of the loan and can sell it at any time with no prepayment penalty. The non-recourse feature is simply there to protect the homeowner and the lender from “crossover” loss, that point where the sale of the home is not sufficient to pay off the loan balance. At the time the homeowner wishes to sell, they cannot be held responsible for the portion of the loan that exceeds the home’s value.
So, who pays for this?
Before you say this is too good to be true, this is why FHA collects mortgage insurance premiums. FHA’s Mutual Mortgage Insurance Fund (MMIF) is a collection of funds created specifically for this purpose. But who pays for it? The large pool of HECM borrowers pay for it indirectly through the insurance premiums that accrue on their balances.
The non-recourse feature may also allow the heirs to obtain the home for less than market value. After the last borrower has died, the non-recourse feature allows the heirs to obtain the property for either 95% of the home’s value or the loan balance, whichever is LOWER. Again, there is no recourse to the estate for this.
Order my book today to learn more about how FHA protects consumers and ensures that the heirs are not stuck with a bill. Understanding Reverse is the most comprehensive guide for answering your most common questions about Home Equity Conversions.