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Paying your property taxes with a reverse mortgage

HECM Reverse Mortgage

Sep 10

Paying your property taxes with a reverse mortgage

One of the leading causes of reverse mortgage defaults is the failure of the homeowner to pay property taxes on time.

When homeowners obtain a reverse mortgage, they maintain title and property ownership, and thus responsibility for taxes, as well as insurance, utilities, and other expenses.

Falling behind on property taxes can lead to a default on the loan. If this occurs, the lender will require immediate repayment, which typically means selling the property.

If you’re considering a reverse mortgage but having trouble paying your property taxes, you are not necessarily disqualified from getting one. In fact, for many seniors, reverse mortgage proceeds can help them stay current on their property tax bills.

Your eligibility for a reverse mortgage, however, may be impacted if you have already taken steps to deal with delinquent property taxes.

Reverse mortgage impacts on deferral and exemption programs
Many states and jurisdictions offer seniors who struggle to pay their property taxes a deferral option. These programs allow seniors to defer their tax payments to a later date. The accumulated amount of unpaid taxes plus interest are typically repaid when the homeowner dies or sells the residence.

According to the National Reverse Mortgage Lenders Association (NRMLA), you can only participate in a property tax deferral program at the same time you have a reverse mortgage if the lien created by the deferral program is subordinate to the reverse mortgage loan.

This is not the case in most areas of the country. One of the few areas that allow simultaneous participation in a reverse mortgage and a property tax deferral program is Massachusetts. You should speak with a reverse mortgage lender to determine if you’re allowed a property tax deferral in addition to a reverse mortgage.

Another option available to help seniors with their property taxes are tax exemption programs. These differ from a deferral program in that they provide a permanent reduction in a senior’s property tax bill.

Examples of property tax exemptions include homestead exemptions for people using their house as their primary residence, as well as those for seniors, veterans, and those who are disabled.

Having a reverse mortgage typically does not affect your eligibility for a property tax exemption, nor will having an exemption prevent you from qualifying for a reverse mortgage. In some areas, if you have a property tax exemption, you may need to reapply for it after you obtain a reverse mortgage.

With a property tax exemption, you’re not postponing tax payments and accumulating a large debt like you are with a deferral program. Instead, you are receiving a reduction in your tax bill. As long as you pay the taxes you owe to your taxing authority, you can also maintain a reverse mortgage.

Property tax set asides
If you struggle to pay your property taxes prior to obtaining a reverse mortgage, you may be required to set aside some of your loan proceeds to pay your future tax obligations.

Because of an increasing number of reverse mortgage defaults, the Federal Housing Administration (FHA) now requires potential borrowers to undergo income and credit assessments before they can obtain an FHA-insured Home Equity Conversion Mortgage (HECM).

To further minimize the possibility of defaults due to failing to pay taxes and insurance, lenders will often establish set aside accounts.

How a set aside works
Set asides in a reverse mortgage are similar to escrow accounts in a standard mortgage. They hold funds needed to pay for costs beyond the principal and interest of the loan. In the case of a set aside, the amount needed to fund the account is deducted from the principal limit on your reverse mortgage.

For example, assume a homeowner could receive a maximum of $150,000 from a reverse mortgage based on their age and home equity, without a set aside. But the borrower’s credit and income raises the possibility that he or she may have trouble paying taxes and insurance, so the lender imposes a $30,000 set aside to cover those costs over the life of the loan. That means the borrower will only receive $120,000 maximum from the reverse mortgage, but the loan amount will still be $150,000.

Set aside amounts are based on the current and future projected costs of the item(s) the account will be paying (e.g. your current and projected property tax obligations), and how long the lender will pay the expense. If the set aside is established for the life of the reverse mortgage, the lender will use your age and life expectancy to determine the amount to set aside.

While set-asides are sometimes mandatory based on your credit and income, you can also establish them voluntarily if you want to ensure that your taxes are paid. When you establish a set-aside, the lender is responsible for paying those costs, just like they are when you establish an escrow account on a standard mortgage.