HECM Lien Status: What It Means for Reverse Mortgage Borrowers

A Home Equity Conversion Mortgage (HECM) can be a helpful tool for homeowners who want to tap into their home equity during retirement. But in order to close on a HECM, the HUD requires the loan to be recorded as the first lien on the property.

This rule ensures the reverse mortgage has priority over all other claims, and it affects whether borrowers with other liens can qualify. Let’s look at what first lien status means and how it impacts homeowners considering a HECM.

What is a first lien?

A lien is a legal claim against a property to secure payment for a debt. When you take out a mortgage, the lender places a lien on the property, giving them the right to be repaid when the home is sold. If a property has multiple liens against it, they’re paid in the order they were recorded. That means the first lien is paid first, followed by the second lien, and so on.

For a reverse mortgage, the HUD requires the loan to be listed as the first lien. That means when the home is sold, or the loan becomes due, the HECM lender gets paid before any other creditors. This ensures the loan can be repaid and reduces the risk to your lender.

Unlike a traditional mortgage, a HECM doesn’t require monthly payments, so the loan balance continues to grow over time. The lender recovers the amount owed when the borrower moves, sells, or passes away. Because the balance can increase significantly, the lender needs to know it will be repaid before any other lienholders.

How existing mortgages and other liens are handled

Most borrowers considering a HECM still have an existing mortgage or other liens tied to the property. These must be resolved so the reverse mortgage can be recorded in first position. In most cases, the lender uses your HECM proceeds to pay off these balances at closing.

Mortgages and second liens

Any mortgages must be paid in full before the HECM can close. For example, if you owe $70,000 on your current mortgage and your HECM principal limit is higher than that amount, the existing loan is paid off automatically at closing. Any remaining proceeds become available as a lump sum, monthly payments, or a line of credit.

HELOCs

Home equity lines of credit (HELOCs) must be closed and paid off before you can take out a reverse mortgage. Unlike a traditional refinance, you can’t keep a HELOC open because it would allow you to borrow more money later and interfere with the reverse mortgage’s first-lien requirement.

Involuntary liens

Involuntary liens are imposed on your property without your consent, typically to secure a payment for a debt or other financial obligation. Here are some examples:

• Property tax liens must be paid before the HECM can close.
• Federal tax liens generally require proof of repayment or an approved IRS payment agreement.
• Judgment or creditor liens must be satisfied or released before closing.
• HOA liens must be paid in full, and the account must be brought current.

In some cases, the lender may also evaluate whether a Life Expectancy Set-Aside (LESA) is needed. A LESA sets aside part of your HECM funds to pay future property taxes and homeowners insurance on your behalf, ensuring those payments stay current.

How lien payoff impacts available HECM proceeds

It’s easy to assume that the number your lender quotes, also called your principal limit, is the amount you’ll receive from a reverse mortgage, but that’s rarely the case. Before you can access any money, the HECM has to pay off all existing property debts, including your current mortgage, any past-due taxes, and other liens tied to the home.

Once those items are paid for, what’s left is the amount you can actually use. And depending on your situation, it might be far less than you expect. For example, let’s say your principal limit is $180,000, but you owe $140,000 on your current mortgage. That means you’ll actually have about $40,000 left to spend. Factors like your age, interest rate, and home value also influence the final amount.

If your HECM proceeds aren’t enough to cover all outstanding liens, you can’t close the loan unless you negotiate a lower payoff with the lienholder. If neither option is possible, you may need to consider alternatives like HELOC, cash-out refinance, or a home equity agreement.

Once the HECM is in place, borrowers cannot take out new loans secured by the home. No new mortgages, HELOCs, or home equity loans are allowed because they would jeopardize the reverse mortgage’s first-lien position. Borrowers must also keep property taxes, homeowners insurance, and HOA dues current to avoid default.

The bottom line on HECM lien status

A HECM must be the first lien on the property, which means all existing mortgages, HELOCs, and other liens must be paid off or resolved before closing.

If you’re wondering whether your property’s lien status will affect your ability to qualify, talk to your reverse mortgage lender. They can review your title, identify any issues that need to be addressed, and help you plan the smoothest path toward approval.