Tom MacDonald - Reverse Mortgage Consultant

     

 

 

 

 

       Reverse Mortgage Consultant

      Tom MacDonald

 

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Subordinating Other Loans When Doing a Reverse Mortgage

It is possible to have loans other than the Reverse Mortgage on a property but unusual.

A subordination is when someone with a lien on a property is willing to let someone else place or hold a lien above theirs.  A typical example is when someone has a first mortgage and a second mortgage or equity loan.  The first mortgage is said to be in first position.  The equity loan is in second position, subordinated to the first mortgage.

With a reverse mortgage it is possible to have a subordination but usually not practical.  First, the lien has to be existing.  It cannot be added as part of the process.  A reverse mortgage borrower cannot borrow money to complete a loan.  Second, most liens are by commercial lenders - Wells Fargo, Bank of America, Chase and such.  They will not subordinate behind a negative amortizing loan which a reverse mortgage is. 

A negative amortizing loan is one where the balance us getting bigger unlike an amortizing loan (like most are) that involves principle and interest payments making the balance smaller after each payment.

Since the reverse mortgage has no payments, the interest, additional draws of principle and fees are added to the balance each month making the reverse mortgage balance grow each month.  Additionally, the reverse mortgage has no limit to the loan life or dollar amount the loan might grow to.  Since it is possible the loan amount could grow to be more than the value of the home (the collateral for the lender).  There are no commercial lenders willing to put themselves in this position.

 The lender who might be willing to subordinate is usually a relative or very close friend who only want to help and is not concerned about getting their money back.  Frequently, it is an heir who may or may not receive enough equity in the home when the borrower passes away to realize enough money to compensate them for their loan. 

Examples

Allowed:  Borrower has an existing 1st and a 2nd mortgage.  The loan proceeds from the HECM loan are sufficient to pay-off the existing 1st mortgage but not sufficient to pay off the existing 2nd.  The existing 2nd lien may be subordinated to a new 1st HECM loan.
 
Not allowed: Borrower has an existing 1st mortgage. The loan proceeds from the HECM loan are not sufficient to pay-off the existing 1st mortgage. The Borrower cannot obtain a new 2nd mortgage in order to close the HECM loan.

Not allowed:  Borrower has existing liens on the property. The loan proceeds from the HECM loan are sufficient to pay-off the existing liens but not sufficient to pay all or part of the closing costs.  The Borrower cannot obtain a new 2nd mortgage to pay the closing costs.

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