Yes, you can get a reverse mortgage even if you owe property taxes, but only after the debt is fully resolved before or at the loan’s closing. You cannot simply roll the existing tax debt into the new loan without a clear plan to pay it off. The core problem is created by a non-negotiable federal requirement: the reverse mortgage lender must be in the “first lien position” on your home’s title. A property tax lien is a “senior lien,” meaning the government gets paid first, which directly conflicts with the lender’s requirement and stops the application cold until the tax debt is settled.
This issue is far from rare. A staggering 18% of all FHA-insured reverse mortgages terminated in 2018 because the homeowner defaulted, often by failing to pay property taxes or insurance. This statistic highlights the critical importance of understanding your ongoing financial duties. This article will break down exactly how to navigate this complex situation.
Here is what you will learn:
- 💰 How to resolve existing property tax and federal tax debts to meet the strict requirements for a reverse mortgage .
- 📝 The step-by-step process of the mandatory Financial Assessment and what lenders are really looking for in your credit and income history.
- 🛡️ What a Life Expectancy Set-Aside (LESA) is, why it might be required, and how it can be the key to getting your loan approved even with a shaky financial past.
- ⚖️ The critical differences between how lenders handle delinquent property taxes versus unpaid federal income taxes during the application process .
- 🚫 The most common and costly mistakes homeowners make that lead to default and foreclosure, and how you can avoid them .
The Unbreakable Rule: Why Lenders Demand First Place on Your Home’s Title
A reverse mortgage is a special type of loan that allows homeowners aged 62 and older to turn their home equity into cash. Unlike a regular mortgage where you make monthly payments to a lender, a reverse mortgage pays you. The loan, plus all the interest and fees that have been added over time, only has to be paid back when the last borrower sells the home, moves out, or passes away .
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development (HUD). Because the FHA insures these loans, it sets strict rules that lenders must follow. One of the most important rules is that the HECM loan must be the primary debt on the home.
This is known as being in the “first lien position.” A lien is a legal claim on a property for an unpaid debt. If you have a regular mortgage, the bank has a lien. If you don’t pay your property taxes, the county government places a lien on your home.
A property tax lien is special because it is a “senior lien.” This means the taxing authority—your city or county—has the first right to be paid before any other lender if the house is sold. A reverse mortgage lender will never approve a loan if another lien has priority over theirs. Therefore, any existing property tax liens must be completely paid off for the loan to go through.
The Government’s Other Hard Stop: No Delinquent Federal Debt
Beyond local property taxes, there is another absolute barrier to getting a HECM reverse mortgage. Federal regulations at 24 C.F.R. § 206.32 state that a borrower cannot be delinquent on any federal debt. This is a black-and-white rule with no exceptions.
This rule covers more than just income taxes owed to the IRS. It includes any money you might owe to the U.S. government, such as defaulted federal student loans or other unpaid federal obligations . When you apply, the lender is required to check public records and credit reports to verify that you have no outstanding federal debts .
If a federal tax lien or any other federal debt delinquency appears on your record, the lender must immediately stop processing your application . The application cannot move forward until you have proven that the debt has been resolved according to HUD’s specific guidelines.
Your Path to Approval: A Step-by-Step Guide to Clearing Your Tax Debts
If you have outstanding property or federal taxes, you have a clear path to getting approved for a reverse mortgage. The key is to address the debt head-on before or during the loan process. The steps you need to take are different depending on whether you owe local property taxes or federal income taxes.
For delinquent property taxes, the solution is straightforward. The outstanding amount must be paid in full. In many cases, you can use the money from the new reverse mortgage itself to pay off the delinquent property taxes at the closing table . This is a common practice where the title company handling the closing sends a payment directly to the county tax office, clearing the lien and allowing the reverse mortgage to take the first lien position.
For delinquent federal taxes (IRS debt), the rules are much stricter. HUD regulations explicitly prohibit using reverse mortgage funds to pay off a pre-existing federal tax lien . You have two options to resolve this:
- Pay in Full: You can pay the entire IRS debt using your own money from savings or other assets before the loan closes .
- Establish a Repayment Plan: You must contact the IRS and set up a formal, valid repayment agreement. Crucially, you must then make at least three consecutive, on-time monthly payments on that plan before the lender can proceed with your application. You cannot prepay these three months in a lump sum; you must show a pattern of consistent payments .
This three-payment rule is a test of your financial discipline and “willingness to pay,” a concept that is central to the next major step in the approval process: the Financial Assessment.
The Financial Assessment: The Lender’s Crystal Ball for Your Future Payments
Before 2015, getting a reverse mortgage was mostly about your age and home equity. Lenders didn’t have to seriously check if you could afford the future costs of owning your home. This led to a disaster. Many seniors took a large lump-sum payment, spent it, and then couldn’t afford to pay their property taxes and homeowners insurance, leading to a wave of foreclosures.
The problem got so bad that the FHA insurance fund required a $1.7 billion bailout from the U.S. Treasury in 2013. In response, Congress passed the Reverse Mortgage Stabilization Act of 2013, which gave HUD the power to fix the program. The result was the mandatory Financial Assessment for all HECM applications submitted on or after April 27, 2015.
This assessment is a deep dive into your entire financial life. The lender must verify your income, assets, monthly living expenses, and credit history. They are specifically looking for two things: your capacity to pay (do you have enough money?) and your willingness to pay (do you have a good track record of paying your bills on time?). A history of late payments on property taxes or other housing costs is a major red flag.
The outcome of this assessment determines not just if you get the loan, but how the loan is structured. If you pass with flying colors, you can manage your tax and insurance payments yourself. If the lender sees a risk that you might struggle in the future, they can still approve the loan, but with a mandatory safeguard: a Life Expectancy Set-Aside.
The LESA: Your Forced Savings Account for Taxes and Insurance
A Life Expectancy Set-Aside (LESA) is the main tool lenders use to approve applicants who might otherwise be denied due to poor credit, a history of late payments, or not enough monthly income. A LESA is a portion of your reverse mortgage money that is “set aside” at closing specifically to pay for your future property taxes and homeowners insurance.
Think of it like an escrow account on a regular mortgage, but instead of you paying into it each month, it’s funded upfront from your home’s equity . The amount set aside is calculated to cover these bills for the rest of your estimated life expectancy. The lender or loan servicer then takes over the responsibility of paying these bills directly on your behalf.
A LESA is mandatory if the Financial Assessment shows you are a risk for future default. This is often triggered by late mortgage or property tax payments in the last 24 months or if your monthly residual income (the money left over after paying bills) is too low.
The biggest downside of a LESA is that it reduces the amount of cash you can get as a lump sum, monthly payment, or line of credit. For example, if you were eligible for $200,000 but needed a $90,000 LESA, you would only have access to $110,000 for your own use. It’s a trade-off: you get the loan approved and the peace of mind that your bills are paid, but you have less access to your home’s equity.
Real-World Scenarios: Navigating Tax Debt with a Reverse Mortgage
Abstract rules can be confusing. Let’s look at three common scenarios to see how these rules play out for real people.
Scenario 1: The Proactive Planner with an IRS Lien
James is 72 and owes the IRS $12,000 from a previous business venture. He wants a reverse mortgage to supplement his Social Security income. He knows the IRS lien will stop his application.
| James’s Strategy | The Result |
| James contacts the IRS and sets up a repayment plan of $400 per month. He makes four on-time payments before applying for the HECM. | The lender verifies the repayment plan and the four months of consistent payments. This satisfies the “willingness to pay” requirement. |
| During the Financial Assessment, his credit history is otherwise good, and his income is stable. | James is approved for the reverse mortgage without a mandatory LESA. He continues making his IRS payments from his own funds. |
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Scenario 2: The Homeowner with Late Property Tax Payments
Susan is 78 and lives on a fixed income. She has paid her property taxes late twice in the last two years because the large, twice-a-year bills are hard to manage. She is not currently behind but has a documented history of late payments.
| Susan’s Situation | The Lender’s Decision |
| Susan applies for a HECM. Her credit report shows the two late property tax payments within the last 24 months. | The underwriter flags this as a significant risk factor, indicating a potential struggle with future payments. |
| Her monthly residual income is just enough to meet HUD’s minimum requirements, but offers no extra cushion. | Susan’s loan is approved, but with a mandatory, fully funded LESA. A large portion of her loan proceeds is set aside, and her loan servicer will now pay her property taxes and insurance directly. |
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Scenario 3: The Applicant with an Unresolved Tax Lien
Robert, age 68, applies for a reverse mortgage while having an active $8,000 federal tax lien. He hopes to use the lump-sum payment from the reverse mortgage to pay off the IRS immediately after the loan closes.
| Robert’s Plan | The Inevitable Outcome |
| Robert submits his application, assuming the tax lien can be handled at closing like a regular mortgage. | The lender’s credit check immediately reveals the federal tax lien. The application process is halted. |
| The loan officer informs Robert that HUD rules forbid using HECM funds to pay off a federal tax lien and that he is ineligible to proceed. | Robert’s application is denied. He is told he cannot re-apply until he either pays the lien in full from other sources or establishes a three-month history of payments on an IRS repayment plan. |
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State-Level Help: Property Tax Relief Programs Can Be a Lifeline
While federal rules govern the reverse mortgage itself, many states offer their own programs to help seniors manage property tax bills. These programs can be a powerful tool to prevent delinquency in the first place, making it easier to qualify for and maintain a reverse mortgage. These programs vary widely, but they often fall into a few categories.
Property Tax Deferral Programs: Some states, like Oregon, allow eligible seniors to defer their property tax payments . The state pays the taxes to the county on the homeowner’s behalf and places a lien on the property. The deferred taxes, plus interest, are then repaid when the home is sold or the owner passes away. This can work alongside a reverse mortgage, but you must check your state’s specific rules.
Senior Exemptions or “Freezes”: Many states offer property tax exemptions that reduce the taxable value of a home for seniors, lowering their bill. For example, a study found that participation in a senior homestead exemption was associated with a 60% reduction in the likelihood of property tax default . Other programs, like those in Tennessee and Illinois, can “freeze” the property tax amount, protecting seniors from future increases .
Local and Municipal Programs: Don’t forget to check with your city or county. Some municipalities, like Madison, Wisconsin, offer their own small, low-interest loan programs specifically to help seniors pay their property taxes . These local programs can be a crucial first line of defense against falling behind.
Mistakes to Avoid: Common Pitfalls That Lead to Foreclosure
Getting the loan is only half the battle. A reverse mortgage is not a “set it and forget it” product. You have ongoing responsibilities, and failing to meet them can have devastating consequences. Here are the most common mistakes to avoid.
- Forgetting About Property Charges: This is the single biggest reason for default. The advertising message of “no more monthly mortgage payments” can create a false sense of security. You must budget for large, irregular bills like property taxes and homeowners insurance.
- Ignoring Notices from Your Servicer: If you fall behind, your loan servicer will send you notices. Ignoring them is the worst thing you can do . Contact them immediately to discuss your options. Poor communication is a major problem in the servicing industry, so you must be proactive.
- Failing to Maintain the Home: Your loan agreement requires you to keep your home in good repair according to FHA standards. If the property falls into significant disrepair, the lender can call the loan due and payable, leading to foreclosure.
- Not Understanding the Occupancy Rules: The home must be your principal residence, meaning you live there for the majority of the year. If you move into a nursing home or assisted living facility for more than 12 consecutive months, the loan becomes due .
- Leaving a Non-Borrowing Spouse Unprotected: If your spouse is not a co-borrower on the loan, their ability to stay in the home after you pass away depends on strict rules established in 2014. If they don’t qualify as an “Eligible Non-Borrowing Spouse,” they may face foreclosure.
Key Players and Organizations in the Reverse Mortgage World
Navigating a reverse mortgage involves interacting with several key entities. Understanding who they are and what they do is crucial.
| Entity | Role and Importance to You |
| U.S. Department of Housing and Urban Development (HUD) | The federal agency that oversees the FHA and sets the rules for HECM reverse mortgages. Their guidelines on financial assessments, property charges, and non-borrowing spouses are the law of the land . |
| Federal Housing Administration (FHA) | A part of HUD that insures HECM loans. This insurance protects lenders from losses if the home sells for less than the loan balance, but you pay for this protection through mortgage insurance premiums. |
| Your Lender/Originator | The bank or mortgage company that processes your application, conducts the Financial Assessment, and provides the loan funds. You should shop around to compare fees and interest rates from different lenders. |
| Your Loan Servicer | The company that manages your loan after it closes. They handle sending you statements, managing your LESA if you have one, and initiating foreclosure if you default. This may or may not be the same company as your original lender. |
| HUD-Approved Housing Counselor | An independent, certified professional you are required to meet with before you can apply for a HECM. They will explain the pros, cons, costs, and alternatives to a reverse mortgage. Their job is to educate you, not sell you a loan . |
| Consumer Financial Protection Bureau (CFPB) | A federal watchdog agency that protects consumers from unfair financial practices. They have fined reverse mortgage companies for deceptive advertising and you can file a complaint with them if you have a problem with your lender or servicer . |
| National Consumer Law Center (NCLC) & AARP Foundation | These are non-profit consumer advocacy groups that fight to protect seniors from predatory lending and improper foreclosure practices. They publish reports on servicing failures and file lawsuits against companies that violate borrowers’ rights . |
Pros and Cons of Using a Reverse Mortgage
A reverse mortgage can be a powerful financial tool, but it’s not right for everyone. Carefully weigh the advantages and disadvantages before making a decision.
| Pros | Cons |
| Eliminates Monthly Mortgage Payments: This frees up significant cash flow in your monthly budget, which can relieve financial pressure. | High Upfront Costs: Origination fees, closing costs, and mortgage insurance premiums can be much higher than for a traditional mortgage, often totaling thousands of dollars. |
| Provides Tax-Free Cash: The money you receive is considered a loan advance, not income, so it is not taxable and generally doesn’t affect Social Security or Medicare. | Depletes Home Equity: The loan balance grows over time as interest and fees are added, which reduces the equity you can leave to your heirs or use for future needs . |
| Allows You to Age in Place: You can access your home’s value without having to sell it and move, which is a primary goal for many seniors. | Risk of Foreclosure Still Exists: You can lose your home if you fail to pay property taxes, maintain insurance, or keep the home in good repair . |
| Non-Recourse Protection: You or your heirs will never owe more than the value of the home when the loan is repaid, even if the loan balance is higher. FHA insurance covers the difference . | Can Affect Other Benefits: While not considered income, the cash you receive is an asset. A large lump sum could make you ineligible for need-based programs like Medicaid or Supplemental Security Income (SSI). |
| Flexible Payout Options: You can choose a lump sum, a monthly payment for life (tenure), a monthly payment for a set period (term), or a line of credit you can draw on as needed . | LESA Reduces Available Funds: If a mandatory LESA is required, it can significantly reduce the amount of money you have available for other living expenses. |
Frequently Asked Questions (FAQs)
Q: Can I use the reverse mortgage money to pay off my existing regular mortgage? A: Yes. In fact, if you have an existing mortgage, you are required to pay it off with the proceeds from the reverse mortgage at closing. This ensures the new loan is in the first lien position .
Q: Are the funds I receive from a reverse mortgage considered taxable income? A: No. The IRS considers the money to be a loan advance, not income. Therefore, the proceeds are not taxable and generally do not affect your Social Security or Medicare benefits.
Q: Who owns my house if I have a reverse mortgage? A: You do. You retain the title and full ownership of your home. The lender only places a lien on the property as security for the loan, just like with a traditional mortgage.
Q: What happens if I outlive the funds in my LESA? A: If the LESA account is depleted, the full responsibility for paying property taxes and insurance reverts to you, the borrower. You must then begin paying these bills from your own funds.
Q: Can my heirs inherit my house if I have a reverse mortgage? A: Yes. After you pass away, your heirs can choose to pay off the loan balance (or 95% of the home’s appraised value, whichever is less) and keep the home. Otherwise, they can sell it.
Q: Can I get a reverse mortgage if I have bad credit? A: Yes, but it will be more difficult. The Financial Assessment reviews your credit history. A poor history, especially with late housing payments, will likely trigger a mandatory Life Expectancy Set-Aside (LESA) as a condition of approval.