How are subordinate liens handled on an FHA reverse mortgage?

The property need not be debt-free for a borrower to be eligible for a Home Equity Conversion Mortgage (HECM).

There shall be no outstanding or unpaid obligations (secured or unsecured), arising from or incurred in connection with the HECM transaction (except in certain cases involving allowable repairs and mortgage servicing charges.)

The credit report must be reviewed to check for any claims, defaults or debts owed to the Federal government; and any existing debts secured by liens against the property.

1. All first mortgage liens, secured or unsecured, must be satisfied prior to or at the HECM loan closing. If a borrower has a first lien that is the result of a state or local court-order, the lien may be re-subordinated to third lien position.

2. If the HECM loan proceeds cannot satisfy the first lien, the homeowner is prohibited from obtaining interim financing, secured or unsecured, to cover the amount needed at closing and/or subordinating any portion of the lien that cannot be repaid with the HECM loan proceeds or other financial resources.

EXAMPLE: A homeowner is refinancing an existing forward mortgage and the HECM proceeds will be insufficient to cover the mortgage payoff, closing costs and other debts. The homeowner is prohibited from obtaining financing to cover the amount needed at closing and/or subordinating any portion of the forward mortgage that cannot be satisfied with HECM loan proceeds or other permissible funding sources.

3. All existing second liens, as evidenced by the title search and tri-merged credit report, can be satisfied on or at HECM loan closing. Existing second liens may also be re-subordinated to third lien position behind the first and second HECM liens.

4. Federal judgments and debts must be paid off or a payment plan must be in place on or prior to closing.

5. FHA does not require payoff of UNSECURED state, local and court ordered judgments against HECM borrowers, however, it may be required by the lender.

6. It is the lender's responsibility to ensure that the first and second HECM liens are the first and second liens of record and that other subordinate liens do not intervene between the first and second mortgage.

7. After a HECM loan is insured, the HECM mortgagor is not restricted from seeking a home equity loan, or engaging in another type of real estate financing transaction which would require an additional lien to be subordinated to the HECM first and second liens.

For more information regarding HECM loans go to https://www.hud.gov/program_offices/housing/sfh/hecm/

For additional information see:
Mortgagee Letters 2009-49 and 2006-20 available at https://www.hud.gov/program_offices/administration/hudclips/letters/mortgagee

Handbook 4235.1, Section 4-2E is available at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

ML 09-49, 06-20; Handbook 4235.1, Section 4-2E; 24 CFR 206.32(a)

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-03749