Do You Need Mortgage Insurance with a Reverse Mortgage?
The simple answer to the question posed above is “yes”. You do need mortgage insurance with a reverse mortgage. In fact, the FHA requires that you do so. For those who have only ever taken out a conventional home loan, this may sound a bit confusing. Why do you need insurance with a guaranteed loan? The FHA backs your loan, guaranteeing the lender that even if you were to somehow default on the loan, they would be able to recoup most of their money. Why, then, are you required to carry insurance?
PMI: With a conventional home loan, if you put down less than 20% of the home’s value as a down payment, you are required to carry private mortgage insurance until your loan-to-value ratio (LTV) reaches 80%. Then the insurance can be done away with. However, the situation with FHA-backed loans is different.
MIP: With all FHA-backed loans, borrowers are required to carry insurance on the loan and to pay both an upfront fee, called a mortgage insurance premium, or MIP, and annual mortgage insurance premiums, or AMIPs. Unlike a conventional mortgage, you cannot remove this insurance when the LTV reaches 80%. In fact, most borrowers will have to carry insurance for the life of their loan. This applies to all FHA loans, not just reverse mortgages. However, the situation with HECM loans differs from other loans in some ways.
HECM Insurance Specifics
With other FHA loans, there is some chance that borrowers may be able to eliminate their mortgage insurance premiums after 11 years. However, that does not apply to reverse mortgages because you are (generally speaking) not making monthly payments to reduce your loan-to-value ratio. So, how does the insurance situation work here?
According to HUD, you will be responsible for an initial, upfront mortgage insurance premium of 2% of the loan’s value. This can be rolled into the loan if you wish, although this increases your costs. After that, you will be charged an annual mortgage insurance premium of 0.5% of the loan’s value. This can also be rolled into the life of the loan if you wish.
With a standard FHA 203(b) loan, mortgage insurance premiums are guarantees to the lender. However, with a reverse mortgage, those premiums work to the borrower’s benefit. For instance, if you were to default on the loan, the premium paid guarantees that the mortgage is a non-recourse loan, meaning that the lender cannot come after your heirs for repayment of the loan. All they can do is take the home and sell it.
Secondly, if the lender were to become insolvent and be unable to make the monthly payments to you, the borrower, that premium guarantees that you will continue to receive your money from HUD/FHA.