Are reverse mortgages non-recourse loans?

Short answer: yes. Every HECM reverse mortgage is non-recourse. This is one of the most important protections in the whole program, and it's worth understanding exactly what it does and doesn't do.

What "non-recourse" means

A non-recourse loan is secured only by the property. If the loan isn't fully repaid by the home, the lender can't come after you, your bank accounts, your other assets, or your kids for the rest.

On a reverse mortgage, that matters because the balance grows. Interest and mortgage insurance are added every month instead of paid. Over a long time, especially if home values go flat or drop, the balance can grow larger than the home is worth.

When that happens, the non-recourse feature kicks in. The home is sold, the sale pays what it can, and FHA insurance covers the shortfall. Nobody gets a bill for the difference.

How it works for your heirs

When the last borrower (or an eligible non-borrowing spouse) no longer lives in the home, the loan comes due. Your heirs then have choices:

• Sell the home. If it sells for more than the balance, the extra money goes to them. If it sells for less, the sale can generally be for at least the lesser of the balance or 95 percent of the appraised value, and the loan is considered paid in full.
• Keep the home. They can pay off the loan, often by refinancing or with their own money, and they won't have to pay more than 95 percent of the appraised value. Talk with the servicer about how much is required to keep it.
• Hand it back. If there's no equity, they can sign a deed in lieu of foreclosure and walk away, owing nothing out of pocket.

That's why I tell families the same thing I've told them for years: a reverse mortgage won't leave your kids with a bill. It may leave them with less equity, but not with debt.

For the full picture, read Reverse Mortgages and Heirs.

Who pays for the protection

You do, in a way. On a HECM, FHA charges mortgage insurance, both upfront and every year. That insurance is what pays the lender when a home sells for less than the balance. It's also what lets HUD keep making your payments if a lender ever fails. See Reverse Mortgage Costs for how the mortgage insurance works.

It's a real cost. It's also the reason heirs don't inherit debt.

What non-recourse doesn't cover

Non-recourse is powerful, but it isn't a free pass:

• You still have obligations. You must continue to pay property taxes and homeowners insurance, maintain the home, and meet the other loan terms. If you don't, the loan can come due while you're still living there.
• It doesn't protect equity. If the balance grows, there may be little or nothing left for your heirs. Non-recourse protects them from owing, not from inheriting less.
• Proprietary loans write their own rules. Proprietary (jumbo) reverse mortgages aren't insured by FHA. The jumbo programs we offer are non-recourse too, but that protection comes from the loan contract, not FHA insurance, so we review each product's documents with you.

What to do next

If protecting your heirs is part of your plan, bring them into the conversation early. I'm glad to walk your family through how the loan gets repaid, and what non-recourse means in your situation. Get your estimate or call us at 530-888-6000.

Related questions

• Will my children or family members lose their inheritance?
• Can reverse mortgages be paid off at any time?
• Do I still own my home if I get a reverse mortgage?
• Reverse Mortgage Pros and Cons

Sources

• 24 CFR Part 206, Home Equity Conversion Mortgage Insurance (206.27, 206.125): ecfr.gov
• Consumer Financial Protection Bureau, reverse mortgages: consumerfinance.gov
• HUD, FHA Reverse Mortgage for Seniors (HECM): hud.gov