Weekly Report publishes the “Servicing Corner” periodically to educate readers on the most commonly asked questions that loan officers ask about HECM servicing guidelines. This week’s edition focuses on partial prepayments and how they are applied to the principal balance.
To address this issue and other important servicing topics, representatives from NRMLA’s Servicing Committee participated on a webinar organized by NRMLA on April 28.
Servicing Committee Chairwoman Gail Balettie explained that the order at which prepayments are applied is governed by the HECM note signed at closing as follows:
- First, to that portion of the Principal Balance representing aggregate payments for mortgage insurance premiums;
- Second, to that portion of the Principal Balance representing aggregate payments for servicing fees;
- Third, to that portion of the Principal Balance representing accrued interest due under the Note; and
- Fourth, to the remaining portion of the Principal Balance.
This prepayment sequence applies to both adjustable and fixed-rate loans.
Provided the loan is not closed-ended, a partial prepayment will cause the Net Principal Limit to increase by the same amount and will increase the Line of Credit, if applicable, Balettie added, so that the borrower can draw on those funds at a later date. Prepayments on a fixed rate HECM may not be re-drawn by the borrower.
The prepayment order may be different for proprietary reverse mortgages, she added, so borrowers are instructed to read the note to find out more. To learn more about this topic, please view the webinar in its entirety at https://www.nrmlaonline.org/event/reverse-mortgage-servicing-update