8199 / Are borrowers under a reverse mortgage responsible for any costs relating to the property underlying the mortgage?

Yes. In connection with the financial assessment that is now mandated by the U.S. Department of Housing and Urban Development (HUD) (see Q Q 8196), a more stringent set of rules has now been implemented to ensure that borrowers under reverse mortgages are able to pay the property charges associated with maintaining the home subject to the mortgage.

If the results of the HUD financial assessment indicate that the borrower may be financially unable to pay the property charges associated with maintaining the home, the lender has two options:

(1) It may set aside a certain amount of the reverse mortgage proceeds to pay future property charges. The amount set aside is based on the life expectancy of the youngest borrower, and the current sum of the tax, hazard and flood insurance charges required to maintain the property, adjusted annually by 1.20 percent to reflect anticipated increases over the life of the mortgage;

(2) It may authorize the borrower to pay property charges as they become due via withholding from the reverse mortgage monthly disbursements or line of credit.¹

Property charges are defined to include costs such as property taxes, hazard insurance premiums, applicable flood insurance premiums, ground rents, condominium fees, planned unit development fees, homeowner’s association fees, and any special assessments that may be levied under municipal or state law.²

Despite this, if it is determined that a set-aside is required to fund the property charges, only property taxes, hazard insurance and flood insurance can be included, though the borrower remains liable for paying all other property charges that arise. Further, if the lifetime set-aside is insufficient to cover charges, the borrower remains liable for paying any property charges in excess of the set-aside.³

The borrower is also entitled to specifically elect to have a set-aside or automatic withholding apply in order to cover applicable property charges even if the results of the financial assessment do not indicate that either option is necessary. If the election is voluntary, the borrower can cancel at his or her request.⁴