Reverse Mortgage Liability

My wife and I are both in our 70's and looking at a reverse mortgage. We have two questions: 1.Who is liable, if the value of our house drops below the amount we have borrowed on it? 2. What is the definition of "net sale proceeds" as used in the Limited Liabilety clause which says, "Your liability under the Plan is limited to the net sale proceeds from the sale of your property"?

2 Answers

Every reverse mortgage comes with a type of " insurance" that will pay the lender the difference between the net sales price and the amount owed if the amount owed is higher. This insurance is paid for up front as a portion of the costs associated with the loan. The more percieved equity in the home, the lower the cost of the insurance. This insurance could be cosidered similar to PMI or Private Mortgage Insurance that is typically associated with high loan to value mortgages.

Net sales proceeds would be the proceeds or "cash" that is left over when the home is sold and all associated costs are paid. For example, if a home was sold for $100,000 and there were $10,000 in realtor fees, taxes, and title fees the "net sale proceeds" would be $90,000. With this being said, your liability under the program would be limited to that amount and IF more was actually owed the insurance mentioned above would kick in the rest.

These are set up this way to protect your heirs or estate from having to come out of pocket to pay back the mortgage.

This is a great question in a declining/stagnate real estate market. The answer to this question is the majority of reverse mortgage providers/your next of kin will have the risk of future value problems. Your loan is set up off of todays market value. If you close on a lump sum payment or a set up an annuitized payment and eventually the home is not worth what you have taken thus far, the loan provider will take out a mortgage insurance policy against this property to cover their risk and you would have "no recourse". This means if they only get a percentage of what the amount they are owed at the time in which the property is transferred, you/your next of kin are not liable for the balance.

As for the net proceeds statement that is referring to the amount your home sells for less selling costs like: real estate agent fees, title closing fees, and standard selling costs. Hope this helps!