When it comes to signing final reverse mortgage loan documents, borrowers are often concerned when the notary presents them with two Deeds of Trust (or mortgages, depending on the location of the property) and a First and Second Note. To further complicate it, the Deed of Trust shows an amount much higher than anticipated and what was agreed upon. The concern over these items has caused several borrowers not to sign their final loan documents, which is why we strive to educate our borrowers prior to the final signing in order to prevent possible confusion.
The quick answer to why reverse mortgage loans have 2 Deeds of Trust and 2 Notes is that the first deed of trust secures the lender’s position and HUD assumes the second position because HUD is insuring that the homeowner will continue to receive loan payments in the event that the lender becomes incapable of making said payments.
Going a little deeper into the explanation, the following quotes are direct from HUD Handbook 4235.1 REV 1. They discuss that every HECM reverse mortgage, fixed or adjustable, shall have a first and second Mortgage and Note. The borrower must only be presented with a copy of the first Note during the application process, but the existence and relationship of the second Note must be fully explained.
“A. Mortgage and note. The lender must provide a copy of the first mortgage and the appropriate first note (fixed or adjustable rate) for review by the borrower during the application process (see Paragraph 4-7), but not later than when the borrower signs the URLA.
B. Second mortgage and note. The lender must complete a second mortgage and second note (fixed or adjustable rate) to secure any payments made by HUD to the borrower. A copy of the second mortgage and second note need not be provided for review by the borrower during the application process, however, their relationship to the first mortgage and first note should be fully explained. The second mortgage and second note secure any mortgage payments which might be made by HUD to the borrower in the event that the lender fails to make the payments under the loan Agreement.”
What the above quote says is that if the lender is unable to make payments to the borrower, then due to the second mortgage and note, HUD can step in and continue making the payments.
Additionally, the lender has the right to assign the reverse mortgage to HUD when the outstanding balance is equal to or greater than 98% of the Maximum Claim Amount, or when a request for a line of credit draw will cause the outstanding balance to equal or exceed 98% of the max claim amount. After assignment, HUD will be responsible to making all future loan advances. The second Note and Deed make this assignment possible.
Without having 2 mortgages and notes, HUD would not insure the loans and without HUD insuring the loans, lenders would not be willing to make them.
Moving on, the reason for the larger loan amount on the loan docs is that due do the fact that there is no maturity date with a reverse mortgage, HUD has designed a calculation by increasing the amount on the deed of trust by 150% of the maximum claim amount or appraised value, whichever is less.
Since reverse mortgages require no payments and the loan balance increases over time, HUD policy does not require a maximum mortgage amount to be stated in the mortgage; however most states do require an amount be stated. If the beginning balance of the loan was stated, then no amounts beyond this balance could be forwarded to the borrower.
Using an example, if a home appraised at $300,000, the amount recorded on the Note and Deed would be for $450,000. Similarly, if a home was valued at $625,500, the amount on the Deed would be $938,250. Since the current lending limit is $625,500, any home that appraises beyond $625,500 will also have $938,250 recorded.
The most important item to note is that the amount of money you owe on your reverse mortgage is equal to the money you borrow plus and accrued interest, mortgage insurance and financed fees.
So, when you go to sign your final paperwork remember that reverse mortgages have 2 Notes and 2 Deeds of Trust (or Mortgages), the amount on the loan documents will be equal to the 150% of the lesser of the maximum claim amount or appraised value and you owe only what you borrow, plus accrued interest, mortgage insurance and financed closing costs.
If you’re interested in finding out more about a reverse mortgage don’t hesitate to contact us by calling 1-888-888-4834.