Yes, a lien can be placed on a reverse mortgage—in fact, the reverse mortgage itself is a lien on your property. When you take out a reverse mortgage, the lender records a mortgage lien against your home, just like with a traditional mortgage. This lien secures the lender's interest and ensures repayment when the loan becomes due. You remain the legal owner of the home, but the lender has a claim on the property until the loan is repaid.
Understanding how liens interact with reverse mortgages is crucial for homeowners considering this financial product. This article explains the nature of the lien, priority rules, how existing liens affect eligibility, and what happens with tax liens or judgments.
How a Reverse Mortgage Creates a Lien
A reverse mortgage is a loan that allows homeowners aged 62 or older to convert part of their home equity into cash without making monthly mortgage payments. The loan is repaid when the borrower sells the home, moves out permanently, or passes away. To secure the loan, the lender places a lien on the property. This lien is recorded in public records and gives the lender a legal claim to the property if the loan is not repaid according to its terms.
According to The Mortgage Reports, "A reverse mortgage does allow your lender to put a lien on your property, but you remain the legal owner of the home." The lien does not transfer ownership; it simply ensures the lender can recover the loan balance when the home is sold or the borrower dies.
Because the reverse mortgage is a lien, it must be in first position—meaning it takes priority over any other liens on the property. This requirement is standard for most mortgages, including reverse mortgages. As noted by Reverse Mortgage.org, "A reverse mortgage must be the only lien on a property. This means, in order to obtain a reverse mortgage, you must pay off any existing liens."
Priority of Liens on a Reverse Mortgage
When multiple liens exist on a property, they are ranked by priority. The first lien has the highest claim and gets paid first if the property is sold or foreclosed. A reverse mortgage must be in first lien position, so any existing mortgages or other liens must be paid off at closing using the reverse mortgage proceeds or other funds.
After the reverse mortgage is in place, any subsequent liens (such as a home equity line of credit or a judgment lien) would be subordinate to the reverse mortgage. This means the reverse mortgage lender would be paid first if the property is sold. As explained by Reverse Mortgage Credit, "A reverse mortgage is a recorded mortgage lien, just like any other mortgage. It would take priority over any subsequent liens."
However, certain liens, such as property tax liens, may have priority over a reverse mortgage by law. This is important because failure to pay property taxes can lead to foreclosure, even with a reverse mortgage. Borrowers are required to stay current on property taxes, homeowners insurance, and other property charges as part of the loan agreement.
Existing Liens and Reverse Mortgage Eligibility
If you have an existing lien on your home, such as a traditional mortgage, home equity loan, or even a tax lien, you may still be able to get a reverse mortgage, but the existing lien must be paid off at closing. The reverse mortgage proceeds can be used to pay off an existing mortgage, but not all liens can be paid with loan proceeds.
According to Reverse Mortgage Credit, "Loan applicants may still qualify if they have an existing mortgage. However, the reverse mortgage must be in the first lien position, so any existing debt must be paid off before proceeding with the reverse mortgage." This means you can use the reverse mortgage to pay off your current mortgage, but you cannot use it to pay off federal tax liens or certain other debts.
Specifically, the Department of Housing and Urban Development (HUD), which regulates the federal Home Equity Conversion Mortgage (HECM) program, prohibits using reverse mortgage proceeds to pay off tax liens. The source states: "It is important to note that while you can use the loan proceeds from a reverse mortgage to pay down an existing mortgage balance, you cannot use the loan proceeds to pay off tax liens." Therefore, if you have a tax lien, you must resolve it before closing, either by paying it off with other funds or establishing a repayment plan with the taxing authority.
Tax Liens and Judgments: Impact on Reverse Mortgage
Tax liens and court judgments can complicate the reverse mortgage process. Lenders conduct a financial assessment that includes a review of your credit history, including any tax liens or judgments. If such items appear, the lender will likely pause the application until they are resolved.
As detailed by Reverse Mortgage Credit, "The appearance of any court judgements or state/federal tax liens on an applicant’s credit history will require the lender to halt the reverse mortgage application’s processing until these matters are resolved." To resolve a tax lien, you may need to pay the debt in full or set up a repayment plan with the IRS or state tax authority. If you choose a repayment plan, you typically must make timely payments for at least three months before the lender will proceed.
It's also important to note that while you can use reverse mortgage proceeds to pay off an existing mortgage, you cannot use them to pay off tax liens. This restriction is specific to HECM loans. Private reverse mortgages may have different rules, but it's best to assume similar restrictions apply.
What Happens to the Lien When the Loan Becomes Due?
The reverse mortgage lien remains on the property until the loan is repaid. The loan becomes due when the borrower dies, sells the home, or moves out permanently (e.g., to a nursing home for more than 12 months). At that point, the lien must be satisfied. Typically, the home is sold, and the proceeds are used to pay off the reverse mortgage balance. If the borrower's heirs want to keep the home, they can pay off the loan or refinance it into a traditional mortgage.
Because reverse mortgages are non-recourse loans, the borrower or heirs will never owe more than the home's value, even if the loan balance exceeds the sale price. This is a key protection for borrowers and their estates. As The Mortgage Reports explains, "Because it’s a non-recourse loan, neither you nor your heirs will ever owe more than the home’s value."
Once the loan is paid off, the lien is released, and the property is free of the reverse mortgage claim.
Key Considerations for Homeowners
Before taking out a reverse mortgage, it's essential to understand the lien implications:
- You keep ownership: The lien does not transfer title; you remain the owner and can live in the home as long as you meet loan obligations.
- First lien requirement: Any existing liens must be paid off at closing, except for certain liens that cannot be paid with loan proceeds (like tax liens).
- Ongoing obligations: You must continue to pay property taxes, homeowners insurance, and maintain the property. Failure to do so can trigger foreclosure, even with a reverse mortgage.
- Impact on heirs: The lien will need to be satisfied when the loan becomes due, typically through sale or refinancing by heirs.
For more detailed information on reverse mortgages and liens, consult the National Consumer Law Center's guide or speak with a HUD-approved housing counselor.
Recommended Resources: