In a reverse mortgage, a cross loss occurs when the loan balance exceeds the value of the property at the time the loan is repaid.
A reverse mortgage is a loan where the entire loan balance becomes due when the borrower dies, moves permanently, or sells the home. In return, the lender pays the homeowner a lump sum, fixed monthly payment, or line of credit. In some cases, the amount paid to the owner will be greater than the value of the house when it was sold. In this case, the lender suffered a cross loss.
Key points to remember
- A cross loss occurs in a reverse mortgage when the amount borrowed exceeds the value of the mortgaged property.
- This can happen if the owner lives longer than expected or if house prices drop.
- Borrowers with a reverse mortgage are not liable for cross losses.
- Most borrowers are required to pay for mortgage insurance to mitigate potential loss on the part of the lender.
Understanding Cross Loss
A cross loss is a term that applies to reverse mortgages. A reverse mortgage is a loan given to homeowners who are 62 years of age or older and have considerable net worth. It allows these people to borrow money against the value of their home and receive funds as a lump sum, fixed monthly payment or line of credit. The entire loan balance becomes due when the borrower dies, moves permanently or sells the home.
The loan amount made available through a reverse mortgage depends on several factors. For a home equity conversion mortgage (HECM), by far the most common type of reverse mortgage, the amount that can be borrowed is based on the age of the youngest borrower, the interest rate of the loan and the lesser of the appraised home value or FHA. maximum amount of the claim, which is $970,800 as of January 1, 2022.
Some homeowners choose to take out this loan in equal monthly installments. This is also known as a tenure plan. As long as at least one borrower lives in the home as their primary residence, the lender will make regular payments to the borrower. The lender will then attempt to recoup these costs by selling the home at the end of the mortgage, usually when the borrower dies or moves out.
There is a risk, in this situation, that the total amount paid to the borrower (the amount of the loan) is greater than the value of his home. In this case, the lender will suffer a cross loss. This can happen if, for example, the owner lives much longer than expected or if the price of his house decreases.
If you inherit a reverse mortgage that has suffered a cross loss, you are not responsible for repaying the loss. With a HECM loan (the most common type of reverse mortgage), if a home sells for less than the current loan amount, the heirs receive nothing and Federal Housing Administration (FHA) insurance covers the shortfall. to earn from the lender. So you might not have a house to inherit, but you also won’t have any debt to pay off.
The Consequences of Cross Loss
A cross loss only occurs at the end of a reverse mortgage, which is when the mortgage expires because the borrower dies, moves out, or forces the lender to foreclose.
It is important to recognize that neither the original lender nor his heirs are responsible for paying the cross loss. Although they have borrowed more than the lender can recover by selling the home, reverse mortgages are non-recourse. This means that the borrower is not responsible for reimbursing the loss.
Reverse mortgages are heavily regulated. Federal regulations require lenders to structure the transaction so that the loan amount does not exceed the value of the home and the borrower or the borrower’s estate are not liable to pay the difference if the balance of the loan becomes greater than the value of the house.
How this is done depends on the type of reverse mortgage. For HECMs, by far the most common type of reverse mortgage, homeowners are required to pay for mortgage insurance, which ensures that the lender will be covered against cross losses. The initial mortgage insurance fee for a HECM is usually around 2% of the value of your home.
For proprietary mortgages, the risk of cross loss is mitigated in a different way. Most exclusive reverse mortgage lenders do not require homeowners to pay for mortgage insurance. Instead, they will increase the interest rate they pay. Since personal loans can be riskier for the lender, interest rates on these loans can reach 6%. Currently, interest rates for HECMs (the most common type of reverse mortgage) are around 4%.
What causes cross loss?
In a reverse mortgage, a cross loss occurs when the value of a property is less than the amount borrowed on it. It’s a loss for the lender, not the owner.
Is the borrower liable for cross losses?
HECMs, by far the most common type of reverse mortgage, are federally insured against cross losses. This means that the owner (mortgage borrower) is not responsible for these losses.
When can cross loss occur?
Cross losses can occur if, for example, the owner lives much longer than expected or if the price of his house decreases.
A cross loss occurs in a reverse mortgage when the value of the mortgaged property is less than the amount borrowed. This can happen if, for example, the owner lives much longer than expected or if house prices drop.
Reverse mortgage borrowers are not liable for cross losses. Instead, most borrowers are required to pay for mortgage insurance, which covers their lender against the risk of cross loss.