Reverse Mortgage Property Taxes and Insurance

What the Loan Agreement Requires: The Full List of Property Charges

Families often want the whole list in one place. Federal HECM rules use the term property charges for the recurring costs of owning the home that the borrower must keep paying. Under 24 C.F.R. § 206.205, these include:

• Property taxes. This includes any special assessments levied by local or state law.
• Hazard insurance premiums. Hazard insurance is the part of a homeowners policy that pays to repair or rebuild the house after damage such as a fire or storm.
• Flood insurance premiums. These apply where flood insurance is required.
• Association and similar fees. The rule lists ground rents, condominium fees, planned unit development fees and homeowners' association fees, which the borrower pays on or before the due date.

The regulation says taxes and insurance premiums are paid on or before the due date, either through a set-aside, by the borrower, or by the lender, depending on the loan's arrangement.

Upkeep matters too. The CFPB lists keeping the house in good condition among the borrower's duties. The borrower must also live in the home: under 24 C.F.R. § 206.39, the property must be the principal residence of each borrower at closing.

The loan agreement spells out each of these obligations. Before closing, 12 U.S.C. § 1715z-20(e)(2) requires the lender to provide, at least 10 days ahead, a statement of the borrower's rights and obligations, including all conditions that require repayment. After closing, the servicer watches whether the charges are paid.

Knowing the full list means no bill that arrives in the mail should come as a surprise.

What a Missed Property Charge Payment Can Mean

The worry behind this question is usually simple: could a missed tax bill cost someone the house? It can put the loan at risk, so it is worth understanding plainly.

Under 24 C.F.R. § 206.27(c)(2), the loan states that the full balance becomes due and payable, upon approval of HUD's Commissioner, if any of these occur:

• The home stops being the principal residence. This applies for reasons other than death, when no other borrower lives there as a principal residence.
• A long absence for illness. This applies when a borrower is away more than 12 consecutive months because of physical or mental illness and no other borrower lives there.
• Unpaid property charges. This applies when the borrower does not provide for payment of property charges under § 206.205.
• Another broken loan obligation. This applies when any other obligation under the mortgage is not performed.

Due and payable means the whole balance is now owed: the money advanced plus all the interest and fees added over the years. The CFPB's repayment page also names unpaid taxes or insurance, and failing to keep the home in good repair, as reasons a loan may need to be repaid sooner.

The servicer is the company that manages the loan after closing. It sends statements, handles questions and tracks tax and insurance payments. When a payment is missed, the servicer is the first point of contact. The servicer, or a HUD-approved counselor, can explain what options, if any, may exist to resolve the problem before it reaches foreclosure. HUD writes the HECM rules on default.

Life Expectancy Set-Aside: When Funds Are Reserved for Your Taxes and Insurance

The term "LESA" can sound technical the first time someone hears it. The idea behind it is simple.

A Life Expectancy Set-Aside, or LESA, is a portion of the reverse mortgage funds held back at closing to pay future property charges, chiefly property taxes and insurance. The CFPB's eligibility page lists this as a requirement: the borrower must either have enough of their own money or agree to set aside part of the reverse mortgage funds at closing to pay ongoing property charges, including taxes and insurance, as well as maintenance and repair costs.

A set-aside may be required after the lender reviews the borrower's finances. A borrower may also choose one. The arrangements differ in who pays the bills:

• Servicer pays. In some arrangements the servicer pays the taxes and insurance directly from the reserved funds.
• Borrower pays. In others the borrower keeps paying the bills, and the funds are held in reserve.

The loan documents state which arrangement applies. Federal regulation 24 C.F.R. § 206.205 recognizes that these charges may be paid through the LESA, by the borrower or by the lender.

The trade is real. Money held in a set-aside is not available to the borrower for other uses. HUD sets the rules for how a set-aside is sized, and the lender explains the amount for a particular loan.

A set-aside can take the pressure off remembering to pay these bills, but it does reduce the funds available for other needs.

How the Financial Assessment Works and Why It Matters

Some readers are uneasy about this step because they expected a reverse mortgage to involve no review of their finances at all.

A financial assessment is the lender's review of whether a borrower can keep up with property charges over time. Under rules HUD sets, it can look at income sources such as Social Security, a pension or rental income, along with credit history and what remains each month after regular expenses. HUD may impose requirements beyond those written in the statute. Under 12 U.S.C. § 1715z-20(d)(2)(D), a borrower must meet "any additional requirements prescribed by the Secretary."

This review is different from proving that someone can make monthly loan payments, because a HECM has none. Its focus is narrower: whether taxes, insurance and the other property charges are likely to get paid. If the review suggests they may be hard to keep up with, the lender may require a set-aside.

Other basic conditions sit alongside it. Under 24 C.F.R. § 206.33, the youngest borrower must be 62 or older at closing. Counseling with a HUD-approved counselor is also required. The broader picture is in the overview of reverse mortgage eligibility. Only a lender decides whether a particular application goes forward.

This review is about whether the ongoing costs of owning the home are manageable, not about monthly loan payments.

Keeping Up With Taxes and Insurance on a Fixed Income

For a homeowner on a fixed income, the practical question is how to keep these bills from slipping. Several approaches help.

Asking the servicer. A borrower can ask the servicer how taxes and insurance are tracked on the loan and, if a set-aside exists, which bills it pays.

Reading statements. The servicer's statements show the growing balance and any notices. Federal law, 12 U.S.C. § 1715z-20(e)(3), also requires a yearly statement by January 31 showing the amounts paid to the homeowner, the deferred interest added, and the balance at year's end.

Property tax relief. Some localities offer help with property taxes for older homeowners. The CFPB suggests checking with the county or town tax office. The FTC suggests asking about property tax deferral or postponement programs and how to apply.

Talking with a counselor. A HUD-approved housing counselor can review a household budget and options. HUD's HECM page lists a counselor roster and a phone line, (800) 569-4287.

Ideas for keeping costs manageable on a fixed income are gathered in the guide on staying in your home after retirement.

When a Reverse Mortgage Is One Option Among Several

When housing costs feel heavy, a reverse mortgage is one path among several. Each one trades something.

• Budget and benefits review. This can lower expenses. The CFPB notes that state and local programs help with utilities, fuel and home repairs.
• Property tax relief. Where available, it can ease the tax bill itself without any borrowing.
• Help from family. This keeps debt off the house but depends on relatives' means and on clear agreements.
• Selling or downsizing. This frees equity and can lower costs. It also means leaving the home.
• Home equity loan or line of credit. The CFPB says these may be cheaper ways to borrow, but they usually have monthly payments and depend on income and credit. The reverse mortgage vs. HELOC comparison goes further.
• Cash-out refinance. This replaces the current mortgage with a larger one. The monthly payment continues.
• A reverse mortgage. This is a loan against the home with no monthly loan payment. Interest and charges are added to the balance, so the amount owed grows over time. The borrower must keep living in the home as a principal residence, pay the property taxes and homeowners insurance, and keep up the home. The loan comes due when the last borrower or eligible non-borrowing spouse dies, sells the home or moves out. The basics are covered under what a reverse mortgage is.

The federal statute, 12 U.S.C. § 1715z-20(f)(1), requires HECM counseling to discuss options other than a HECM, including other housing, social service, health and financial options.