The Hidden 'Cost': Property Taxes and Homeowners Insurance

One of the most dangerous and pervasive misconceptions about reverse mortgages is the idea that once the loan closes, the borrower has absolutely zero housing expenses. Some seniors mistakenly believe the bank takes over ownership of the home and handles all bills.

This is entirely false. When you take out a reverse mortgage, you remain the sole owner of the home. You are simply borrowing against your equity. Because you are still the owner, you remain fully responsible for the ongoing costs of homeownership.

Your Ongoing Responsibilities

To keep a reverse mortgage in good standing, you must continue to pay: 1. Property Taxes: Paid to your local county or municipality. 2. Homeowners Insurance: To protect the structure against fire, storms, or disaster. 3. HOA Dues: If you live in a community with a Homeowners Association, you must stay current on dues. 4. Basic Maintenance: You must keep the home in reasonable condition (e.g., you can't let the roof collapse).

Why the Lender Cares So Much

Why does the lender care if you pay your property taxes? Because if you fail to pay them, the county can foreclose on your home to recoup the unpaid taxes.

In real estate law, a county tax lien takes "super priority" over a mortgage lien. If the county forecloses, the lender's massive reverse mortgage investment is wiped out. Similarly, if the house burns down and you let your insurance lapse, the collateral backing the loan is destroyed.

To protect their investment, the lender strictly monitors your tax and insurance status. If you miss a tax payment or your insurance policy is canceled, the lender will declare your reverse mortgage in default.

If you cannot rectify the situation (by paying the back taxes or securing a new insurance policy), the lender has the legal right to foreclose on the home and evict you, even if you are 90 years old. Tax defaults are the leading cause of reverse mortgage foreclosures.

The LESA (Life Expectancy Set-Aside)

Because tax defaults were becoming a serious problem in the industry, the FHA introduced a mandatory "Financial Assessment" during the underwriting process.

Before approving your loan, the lender will look at your credit history and calculate your residual income (how much money you have left each month after paying your basic living expenses).

If they determine you might struggle to pay your taxes and insurance in the future based on your current budget, they won't necessarily deny the loan. Instead, they will require a LESA (Life Expectancy Set-Aside).

A LESA works similarly to an escrow account on a traditional mortgage. The lender takes a portion of your available reverse mortgage funds at closing and locks it in a dedicated account. They then use this account to pay your property taxes and insurance on your behalf for the rest of your life.

While a LESA provides incredible peace of mind (you never have to worry about a tax bill again), it dramatically reduces the amount of upfront cash you can access for other purposes. Understanding these ongoing obligations is crucial to long-term success with a reverse mortgage.