Debt Limit, Repayment

Debt Limit

The debt you owe on a reverse mortgage equals all the loan advances you receive (including any used to finance loan costs or to pay off prior debt), plus all the interest that is added to your loan balance.

If that amount is less than your home is worth when you pay back the loan, then you (or your estate) keep whatever amount is left over.

But if your rising loan balance ever grows to equal the value of your home, then your total debt is generally limited by the value of your home. Put another way, you generally cannot owe more than what your home is worth at the time you repay the loan.

This overall cap on your loan balance is called a “non-recourse” limit. It means that the lender, when seeking repayment of your loan, generally does not have legal recourse to anything other than your home’s value and cannot seek repayment from your heirs. (See Part 3 for an exception to this limit on federally insured reverse mortgages.)

Repayment

All reverse mortgages become due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. (Typically, a “permanent move” means that neither you nor any other co-borrower has lived in your home for one continuous year.)

Reverse mortgage lenders can also require repayment at any time if you fail to:

• pay your property taxes or special assessments;

• maintain and repair your home; or

• keep your home insured.

These are fairly standard “conditions of default” on any mortgage. On a reverse mortgage, however, lenders generally have the option to pay for these expenses by reducing your loan advances, and using the difference to pay these obligations. This is only an option, however, if you have not already used up all of your available loan funds.

Other default conditions could include:

• your declaration of bankruptcy;

• your donation or abandonment of your home;

• your perpetration of fraud or misrepresentation; or

• eminent domain or condemnation proceedings involving your home.

A reverse mortgage may also include “acceleration” clauses that make it due and payable. Generally, these relate to changes that could affect the security of the loan for the lender. For example:

• renting out part or all of your home;

• adding a new owner to your home’s title;

• changing your home’s zoning classification; or

• taking out new debt against your home.

You must read the loan documents carefully to make certain you understand all the conditions that can cause your loan to become due and payable.