11.1 BORROWER RIGHTS AND RESPONSIBILITIES
HECM borrowers remain the owners of their homes; therefore they retain both the rights and responsibilities of any homeowner.
A. They can sell the home at any time, subject to paying off the lien.
B. They can change the home: add on to it, remodel it, paint it purple, etc.
C. They can have others living with them if they choose.
D. They must retain ownership in order to keep the loan.
E. They must keep the home as their primary residence.
F. They must fulfill standard homeowner obligations, including:
1. Property taxes
a. Must be paid on time
b. Property tax deferral loans are not usually permitted in conjunction with HECMs.
c. Property tax relief programs that do not involve a lien are not a problem.
2. Homeowners’/hazard insurance
a. Covers repair or rebuilding in case of fire or other catastrophe b. Replacement value coverage is required
c. Flood insurance may be required if the home is in a flood zone.
3. Other required property charges such as Homeowners’ Association dues, condo fees, ground rents, etc.
4. Maintenance and repair of the home Jim and Patsy Henderson
What are some of the things that the Hendersons are currently responsible for as homeowners with a forward mortgage?
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Does the HECM require anything really different?
11.2 RESIDENCY OBLIGATIONS
A. HECM borrowers must live in the home as their primary or principal residence in order to keep the HECM loan.
1. Principal residence means
a. “Where the borrower typically spends the majority of the calendar year”
b. “Where the borrower maintains their permanent place of abode”
c. Functionally, the borrower could be away for up to 6 months of the year and still claim the home as their primary residence i. Longer absences may be possible if
approved on a case-by-case basis by the servicer.
d. Borrowers are advised to notify the servicer if they plan to be away more than 2 months.
i. Servicers must verify residency at least annually, and if borrowers do not respond promptly to these requests, the servicer might assume that the property had been abandoned.
ii. Shutting off utilities may also be seen as a sign that the borrower has vacated or abandoned the property.
e. If there are two borrowers, the loan stays in place indefinitely, as long as at least one borrower maintains the home as their principal residence.
f. If the last surviving borrower cannot live in the home due to health
conditions, they are permitted to be away from the home for as much as 12 consecutive months before the loan would be called due and
payable.
g. There is no restriction on other people living in the home. For instance, there is no problem with having one of the borrower’s children living in the home, or having a health care worker or other staff person living in the home.
h. The borrower is NOT permitted to rent the entire property to someone else and live somewhere else.
i. Short-term rentals (e.g., of a home at the beach during the tourist season) may be permitted. Borrowers should check with the servicer if they plan to do this. Borrowers must retain the right to return to the home at any time.
ii. The borrower may be permitted to rent a room or small apartment within the home to someone else, as long as most of the home is
available for the borrower’s own use. Again, check with the lender/servicer.
11.3 OWNERSHIP
A. The borrower must retain the ownership of the home in order to keep the HECM.
1. The home may be transferred to a living trust, as long as the borrower remains a lifetime beneficiary of the trust and retains the right to live in the home.
2. The borrower may add other owners, as long as the HECM borrower retains at least a life estate interest.
a. Additional owners, added to the deed after closing, are NOT
borrowers on the HECM loan, and have no right to loan proceeds.
The loan will come due whenever the original borrower dies, sells, or moves out of the home.
i. This means that a younger spouse or newly-acquired spouse may NOT be added to the loan after origination, even if they are added to the title.
ii. Adding a spouse to the loan requires refinancing into a new HECM, subject to prevailing interest rates, closing costs, eligibility guidelines, etc.
11.4 PAYMENT OF PROPERTY CHARGES A. At closing, HECM borrowers can elect to:
1. Pay the taxes and insurance themselves and furnish proof of payment to the servicer.
2. Have the servicer withhold part of each monthly tenure or term payment to cover taxes and insurance, and have the lender take responsibility for making those payments when they are due.
3. Have the lender draw funds from the line of credit each year for payment of taxes and insurance, as long as funds are available.
a. Borrowers may also choose to establish a set-aside specifically for
property charges, from which the servicer will draw funds. This separates these funds from the remainder of the line of credit, making it less likely that the borrower will spend the money on something else.
i. Borrowers seldom choose this option because it ties up loan funds.
B. Failure to pay taxes or insurance can cause the loan to be “accelerated” – called due and payable. The servicer must go through a series of steps before foreclosure could happen:
1. Servicer becomes aware of nonpayment
2. Servicer notifies owner of default and requests that they pay the required property charges
3. If no payment by borrower, servicer may use loan funds if any are available a. If needed, monthly payments may be adjusted to accommodate an
unscheduled draw of funds
b. If a line of credit is available, servicer may draw from there
4. If no loan funds are available, servicer pays the charge out of its own funds and then seeks repayment from the borrower through a loss mitigation process.
a. Servicer attempts to set up a payment plan that is affordable for the borrower
b. If borrower fails to abide by the plan, servicer may refer them to a counseling agency for assistance with seeking other resources
c. If servicer is unable to resolve the situation after “multiple and earnest”
attempts, servicer requests due-and-payable status from HUD
d. If HUD approves the request, servicer notifies the borrower and begins foreclosure process.
e. Borrower can still cure the default at this point if they can pay back the funds advanced by the lender.
11.6 MAINTENANCE
HECM borrowers are required to keep the home in at least the condition it was in at the time of loan origination.
A. Initial required repairs must be completed within the time specified in the loan agreement, usually 6 months but not more than 12 months
B. Servicer has the right to inspect the home.
C. If the borrower fails to maintain the property, the lender may notify the borrower of the deficient condition, indicating the necessary repairs.
D. If the borrower does not begin repairs within 60 days of notification, the lender may seek permission from HUD to declare the loan due and payable.