In a reverse mortgage, a crossover loss occurs when the loan balance exceeds the property value at the time that the loan pays off.
A reverse mortgage is a loan in which the entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home. In exchange, the lender pays the homeowner in a lump sum, a fixed monthly payment, or a line of credit. In some cases, the amount paid to the homeowner will be more than the value of the house when it is sold—in this case, the lender has made a crossover loss.
- A crossover loss occurs in a reverse mortgage when the amount borrowed exceeds the value of the mortgaged property.
- This may happen if the homeowner lives longer than expected or if house prices dip.
- Borrowers with a reverse mortgage are not responsible for crossover loss.
- Most borrowers are required to pay for mortgage insurance, to mitigate the potential loss on the part of the lender.
Understanding Crossover Loss
A crossover loss is a term that applies to reverse mortgages. A reverse mortgage is a loan for homeowners who are age 62 or older and have considerable home equity. It allows these individuals to borrow money against the value of their home and receive funds as a lump sum, a fixed monthly payment, or a line of credit. The entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.
The size of the loan that is made available through a reverse mortgage is dependent 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 youngest borrower’s age, the loan’s interest rate, and the lesser of the home’s appraised value or the maximum claim amount set by the Federal Housing Administration (FHA), which is $970,800 as of Jan. 1, 2022.
Some homeowners elect to take this loan as equal monthly payments. This is also known as a tenure plan. For as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower. The lender will then attempt to recoup these costs by selling the home at the end of the mortgage—typically when the borrower passes away or moves away.
This situation carries a risk that the total amount paid to the borrower (the loan amount) will be greater than the value of their home. In this case, the lender will suffer a crossover loss. Examples of when this can happen are if the homeowner lives much longer than they were expected to or if the price of their home decreases.
If you inherit a reverse mortgage that has a crossover loss, you are not responsible for paying back the loss. With a HECM loan (the most common type of reverse mortgage), if a home sells for less than the outstanding loan amount, heirs receive nothing and FHA insurance covers the lender’s shortfall. So you may not have a house to inherit, but you won’t have a debt to repay.
Consequences of Crossover Loss
A crossover loss only occurs at the end of a reverse mortgage—that is, when the mortgage matures because the borrower passes away, moves away, or otherwise causes the lender to foreclose.
It’s important to recognize that neither the original lender nor their heirs are responsible for paying the crossover loss. Though they have borrowed more than the lender can recoup via selling the house, reverse mortgages are non-recourse. This means that the borrower is not responsible for paying back the loss.
Reverse mortgages are heavily regulated. Federal regulations require lenders to structure the transaction so that the loan amount doesn’t exceed the home’s value and that neither the borrower nor the borrower’s estate will be held responsible for paying the difference if the loan balance does become larger than the home’s value.
How this is done depends on the type of reverse mortgage. For HECMs, homeowners are required to pay for mortgage insurance, which ensures that the lender will be covered against crossover loss. The up-front mortgage insurance fee for a HECM is typically about 2% of your home’s value.
For proprietary mortgages, the risk of crossover loss is mitigated in a different way. Most proprietary reverse mortgage lenders don’t require homeowners to pay for mortgage insurance. Instead, lenders will increase the interest rate that homeowners pay. Because proprietary loans can be riskier for the lender, interest rates for these loans can go as high as 6%. Currently, interest rates for HECMs are about 4%.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).
What causes crossover loss?
In a reverse mortgage, a crossover loss occurs when the value of a property is less than the amount borrowed against it. This is a loss for the lender, not the homeowner.
Is the borrower responsible for crossover loss?
No. Home equity conversion mortgages (HECMs), by far the most common type of reverse mortgage, are federally insured against crossover loss. This means that the homeowner (the mortgage borrower) is not responsible for these losses.
When can crossover loss occur?
Examples of when crossover losses can occur are if the homeowner lives much longer than they were expected to, or if the price of their home decreases.
The Bottom Line
A crossover loss occurs in a reverse mortgage when the value of the property mortgaged is less than the amount borrowed. This can happen if, for example, the homeowner lives much longer than expected or house prices decrease.
Reverse mortgage borrowers are not responsible for crossover loss. Instead, most borrowers are required to pay for mortgage insurance, which covers their lender against the risk of crossover loss.