In a recent column, we addressed the possibility of using an Individual Retirement Account to purchase investment real estate.

We pointed out that one of the challenges was that an IRA-leveraged loan is made to the IRA or plan, not to an individual, and that rules preclude an owner from using his or her personal credit to influence the loan. These IRA loans are known as "nonrecourse" loans, wherein the lender can seek relief from the secured property only in the event of default and foreclosure. The owner’s other assets, such as stocks, bonds and insurance policies, cannot be claimed.

Reverse mortgages also contain a "nonrecourse" component. The U.S. Department of Housing and Urban Development’s Home Equity Conversion Mortgage (HECM) program, the nation’s most popular reverse mortgage with a market share of at least 85-90 percent, often is marketed with the statement, "the senior can never owe more on her HECM loan than her house is worth at the time the loan is paid back."

FHA recently announced that the nonrecourse description in all its reverse mortgages may not be fully accurate in all circumstances. For example, this remote circumstance can occur when the children of the senior want to keep the home after the parent has died or moved out and the debt on the home has exceeded the home’s value.

According to HUD, nonrecourse means that although a borrower will always owe the entire loan balance, if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure. The borrower will not be personally liable for any deficiency resulting from the foreclosure. While the home must be sold or foreclosed to satisfy the debt, no assets — other than the home — will be used to repay the debt.

At any time the borrower (or estate) may sell the property for the lesser of the full debt or the appraised value. If the loan is due and payable, the borrower (or estate) may sell the property for at least the lesser of the full debt or 95 percent of appraised value. However, the borrower (or estate) may not retain the home without paying the entire loan balance, which could mean putting you out of pocket to keep Mom’s home.

To get even more valuable advice from Tom, visit his Second Home Center.

***

What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

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