Property tax and reverse mortgages. Who pays the property taxes with a reverse mortgage?
You do. However, when qualifying for a reverse mortgage, there is a calculation done by the reverse mortgage lender to determine if a borrower has the ability to pay their own property taxes. If there is a lack of income, or if the borrower has been late during the past two years paying property taxes, or doesn’t have the willingness to pay them, the lender can require a type of impound account to be set up, called a LESA. A LESA is an acronym for life expectancy set aside.
The amount of the property tax impound established is not the same as a conventional loan tax impound account. The estimated remaining life expectancy of the borrower, the number of years, and that number of years of property taxes is rolled into the loan amount which at times can be a large dollar amount. So large, that it may be a hinderance on obtaining the reverse mortgage. There needs to be enough lendable equity for the lender to pay off any existing mortgages and liens on the property and roll in the property tax LESA amount. If there isn’t enough lendable equity, the borrower would need to bring in cash to cover the shortage, or else the loan can be declined due to a low appraised value.
The remaining life expectancy is determined by HUD charts and if the borrower outlives the number of years of property taxes collected in the LESA, they would then be responsible for paying the property taxes for the balance of their lifetime.
The lender draws out the collected LESA funds for each property tax installment when it comes due.
When qualifying for a reverse mortgage and it is determined that property taxes were paid on time, the reverse mortgage lender may not require a LESA and the borrower pays their property taxes and other property charges (homeowner’s insurance and possible H.O.A.) on their own.
Here’s a video you can watch https://youtu.be/IQ3qj2OStY8 on how to qualify for a reverse mortgage and another on little known facts on reverse mortgages https://youtu.be/V2g59GK9yU4.
After the reverse mortgage funds, if the borrower is late paying their property taxes, the tax collector for the county can foreclose on the property and sell it to collect their delinquent taxes, and the reverse mortgage lender balance owed is in danger of not being paid. To protect their interest in the property the lender will attempt to foreclose first, before the county, to further protect their interest. This is one reason how and why property tax foreclosures happen with lenders.
All lenders, not just California reverse mortgage lenders, but also conventional loan lenders, HELOC lenders, second mortgage lenders will all foreclose for non-payment of property taxes to protect their interest.
It is vitally important that there is someone in a senior citizen’s life, as they age, to be there and look out for them to make sure property taxes and other property charges get paid in a timely manner to make sure this sort of thing doesn’t happen. It is also important to note that on a HECM reverse mortgage, delinquent property taxes that arise after the loan has funded, can’t be advanced by the reverse mortgage lender and added to the balance of the loan after the loan inception. The HECM reverse mortgage is in the family of FHA loans, and FHA loans do not allow this. Conventional lenders however can allow this. Non-HECM reverse mortgage loans may advance delinquent property taxes, after the loan has funded, and add that amount to the reverse mortgage balance on a case- by -case- basis.
Hopefully this addresses the questions on how property tax and reverse mortgages work and who pays property taxes with a reverse mortgage.
I originate the California reverse mortgage, and was born, raised and reside here.
Feel free to call, text, email or fill out the brief form below with a California reverse mortgage question or scenario and I will get back to you ASAP!
Kind regards,
KW