Who Pays the Property Taxes on a Reverse Mortgage?

A reverse mortgage allows homeowners 62 or older to convert a portion of their home equity into cash. This financial tool provides funds without creating a monthly mortgage payment. A common question is who handles the property tax bill, and the homeowner remains responsible for paying all property taxes. This obligation exists because the borrower retains full ownership and title to the property, with the loan acting as a lien against the home.

The Homeowner’s Responsibility for Property Taxes

When a homeowner enters into a reverse mortgage agreement, their name stays on the property’s title, confirming legal ownership. Because they are still the owner, they are contractually obligated to handle all responsibilities that come with homeownership. These duties are written into the loan documents and include the timely payment of property taxes and homeowner’s insurance premiums.

The lender’s interest is in protecting their financial stake in the property, which is secured by the home’s value. Unpaid property taxes can lead to a tax lien being placed on the home, which takes priority over the mortgage lien. This priority puts the lender’s investment at risk, so the loan agreement explicitly requires the homeowner to stay current on these charges.

Beyond taxes and insurance, the homeowner must also maintain the property according to the loan terms. This means keeping the home in a good state of repair to ensure it doesn’t lose value due to neglect. All these obligations are tied directly to the concept of retained ownership.

How Property Taxes Are Paid

Homeowners with a reverse mortgage have a couple of ways to manage their property tax payments. The most direct method is for the borrower to pay the local taxing authority themselves. This option is available to individuals who can show a solid financial history during the loan’s financial assessment. They receive the tax bills and are responsible for remitting payment on time.

For other borrowers, the lender may require a Life Expectancy Set-Aside (LESA). A LESA is an account funded with a portion of the reverse mortgage proceeds at closing. The amount set aside is calculated based on the borrower’s life expectancy and estimated future tax and insurance costs. The loan servicer then manages this account, using the funds to make payments on the borrower’s behalf.

The requirement for a LESA is determined through a mandatory financial assessment during the application process. This review evaluates the borrower’s income, credit history, and financial capacity. If the assessment indicates a potential risk of future non-payment, the lender will establish a LESA as a condition of the loan. Once the LESA funds are depleted, the responsibility for paying property charges reverts to the homeowner.

Consequences of Failing to Pay Property Taxes

Failing to pay property taxes constitutes a default on the reverse mortgage agreement. This action breaches the loan covenants, which require the borrower to remain current on all property-related charges. When a homeowner becomes delinquent on their taxes, the loan servicer will send notices to alert the borrower and provide an opportunity to resolve the issue.

If the homeowner does not pay the delinquent taxes, the lender will often step in to pay them. The lender does this to protect its lien position against the property, as a government tax lien takes precedence over a mortgage. Any amount the lender pays for taxes is then added to the outstanding loan balance and will begin to accrue interest.

Should the default not be resolved, the lender has the right to declare the entire loan balance due and payable immediately. If the borrower is unable to repay the full amount, the lender can initiate foreclosure proceedings to sell the property and recover their investment. This is the most severe consequence of failing to meet the obligations of a reverse mortgage.