Who Pays The "Shortfall" or Deficiency, if the Sale of the Home Does NOT Cover the Loan Balance?

FACT: UNLIKE the Traditional 30-year fixed forward mortgage, there is a protective measure in a Reverse Mortgage loan, referred to as “Non-Recourse.” This means that the home pays for itself without any “adverse recourse” if the loan balance exceeds the market value of the home at the time the loan is terminated. This protection does not exist outside of the Reverse Mortgage loan.

Example: If the Reverse Mortgage homeowner has had a reverse mortgage loan for 30 years and at the time the loan is terminated, the balance owed is $500,000 and the market value is $400,000, neither the estate nor the heirs owe any additional money to clear the title of the property. The lender accepts the market value of the property as payment in full. In fact, if the heirs wish to retain the property, they will only owe 95% of the market value, not 100%.

In the HECM Reverse Mortgage loan, the “protection” exists due to the Upfront Funding Fee and monthly mortgage insurance. This is the valuable insurance that provides this “Non-Recourse” protection.

This protection does not occur in the traditional forward mortgage space. If there is a deficiency, even in an FHA loan, it is still owed and there will be adverse financial consequences to ensure repayment.

Disclaimer: The information provided is based upon education, solid knowledge, experience, and research; however, it should not be considered professional legal advice. Consult a legal professional with regard to your specific situation.