What Is a Crossover Loss?

A crossover loss is a loss that is realized in a 澳洲幸运5开奖号码历史查询:reverse mortgage, It 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 澳洲幸运5开奖号码历史查询:loan balance becomes due and pa🌜yable 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 hom🐎eowner will be more than the value of the house when it is sold. In this case, the lender has made a crossover loss.

Understanding Crossover Losses

A reverse mortgage is a type of home loan available to homeowners 62 or older. The loan is meant for individuals who have a lot of equity in their homes. Here's how the process works. If a homeowner needs money, they can apply for a reverse mortgage and borrow against the 澳洲幸运5开奖号码历史查询:value of the home.

Some homeowners elect to take their reverse mortgage through what is known as a 澳洲幸运5开奖号码历史查询:tenure plan. This type of plan allows the homeowner to take the funds in fixed monthly payments. For as long as at least one borrower lives in the home as a 澳洲幸运5开奖号码历史查询:principal residence, the lender will make steady payments to the borrowe꧙r.

This situation carries a risk that the total loan amount will be greater than the value of their home. This generally happens if the homeowner lives in the property longer than expected or when 澳洲幸运5开奖号码历史查询:housing prices dr﷽op. In this case, the lender suffers a crossover loss. A crossover loss only occurs at the end of a reverse mortgage, notably when the mortgage matures because the borrower passes away, moves away, or otherwise causes the lender to foreclose. 

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 澳洲幸运5开奖号码历史查询:non-recourse. This means that the borrower is not responsible for paying back the loss. More information on how they are covered is explained below.

Special Considerations

The size of the loan that is made available through a reverse mortgage is dependent on several factors. For a 澳洲幸运5开奖号码历史查询:home equity conve🍸✨rsion mortgage (HECM), which is 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 澳洲幸运5开奖号码历史查询:Federal Housing Administr𒁃ation (FHA), which is $1.09 million as of Jan. 1, 2023.

The loan provider may fund the loan thr𝔉ough one of the following options:

• A fixed monthly payment
• A lump sum
• A line of credit

The loan doesn't come due and payable until the borrower dies, moves from the property, or sells the home. The lender will then attempt to recoup these costs by selling the home at the end of the mortgage, which is typically when the borrower passes away or moves away.

Consequences of Crossover 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 澳洲幸运5开奖号码历史查询: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 澳洲幸运5开奖号码历史查询: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 7%.

Example of a Crossover Loss

Here's a hypothetical example to show how crossover losses work. Let's assume that Rico, 67, is retired and on Social Security. He lives alone and owns his home but wants some additional income. He applies for a reverse mortgage and gets a lump-sum payment from the lender. If Rico dies or moves away from h𓂃is home permanently, the loan must be paid in full.

If Rico has heirs, they may be able to buy the house or sell it and pay back the 🐻loan. In other cases, the lender can take possession of the property and sell the property. The lender will end up with a crossover loss if the value of the remaining loan is greater than the value of the property. So if Rico's loan is $350,000 and the property is valued at $300,000, the lender has a crossover loss of $♕50,000.

As noted above, Rico's lender would likely be protected against the loss through mortgage insurance if the loan was an HECM or if a higher 澳洲幸运5开奖号码历史查询:interest rate is applied to the loan.

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 t💫han 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 leღnder against the risk o💯f crossover loss.