Servicing Corner Borrowers Can Make Partial Prepayments Here’s a Look at How Those Payments Impact the Loan BORROWERS CAN MAKE partial prepayments on their reverse mortgage at any time, in any amount and without any penalty. However, there are a lot of moving parts when a partial prepayment is received by a servicer. In this Servicing Corner, we will focus exclusively on HECM loans. Proprietary products, by and large, also allow borrowers to make partial prepayments—but loan requirements may mean those payments would be applied and treated differently from HECM loans. Once a borrower sends in a partial prepayment, those funds are applied toward the current outstanding balance on the loan. The borrower will see on the monthly statement that the loan balance decreased dollar for dollar by the same amount as the partial prepayment. If the borrower has an open-ended HECM, the borrower also will see that same dollar-for-dollar increase in the net principal limit/line of credit. If the borrower elected to have a closed-end HECM, then the net principal limit will not increase when a partial prepayment is applied—as the loan type prohibits the borrower from reaccessing prepaid funds over the life of the loan. While the borrower will see changes to the loan balance and net principal limit/line of credit, the borrower won’t necessarily see that, behind the scenes, the servicer had to apply the partial prepayment to certain components of the loan balance in a particular order to comply with the “borrower’s right to prepay” section of the model HECM note: • First, it will go to the portion of the loan balance representing accrued mortgage insurance premiums. • Second, it will go to the portion of the loan balance representing accrued fixed monthly servicing fees (most loans originated today do not have a fixed monthly servicing fee, so this would not be applicable in that case). • Third, it will go to the portion of the loan balance representing accrued interest. • Fourth, it will go to the remaining principal portion of the loan balance. It is important to note that, unlike a forward home equity line of credit (HELOC), if a borrower pays the loan balance down to $0 on a HECM loan, it is considered to be paid in full and the lien will be released. In order to prevent a partial prepayment from inadvertently being treated as payoff funds, servicers encourage borrowers to ensure the payment is less than the total current loan balance and also indicate on the check that the funds are intended to be a partial prepayment. Questions About Mortgage Interest Statements As a final note, it is not uncommon for servicers to receive calls from borrowers inquiring about when they will receive their annual Form 1098 Mortgage Interest Statement for tax filing purposes. It’s important to note that this form must be sent to borrowers who have paid the mortgage insurance premium (MIP)/interest in an amount greater than $600 in any given year. Since most borrowers do not make partial prepayments on their loans, they likely will not receive a 1098 until they pay their loan in full. However, if borrowers do make partial prepayments in which—based on the application order listed above—they have paid down accrued MIP and/or interest in an amount greater than $600, they can expect that 1098 from their servicer by the end of January of the following year. 36 REVERSE MORTGAGE / JULY–AUGUST 2023
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