With a reverse mortgage, homeowners are able to tap into the equity in their homes to provide cash to help meet retirement expenses. Under certain circumstances, reverse mortgages can be foreclosed. Read on to learn more about reverse mortgages and when the lender can foreclose.
There are some significant differences between traditional mortgages and reverse mortgages.
With a traditional mortgage, the borrower qualifies for and borrows a large sum of money based on factors such as income, job history, and credit worthiness. Often, a traditional mortgage loan is taken out to purchase real estate. The borrower then has to repay the loan by making monthly installment payments. If the borrower stops making payments, the lender can foreclose.
Reverse mortgages, on the other hand, are designed to allow elderly homeowners to convert the equity in their homes to income or a line of credit. Reverse mortgages are only available for homeowners who:
- are age 62 or over
- occupy the property as a principal residence, and
- own the home outright or have significant equity in the home.
The Federal Housing Administration (FHA) insures almost all reverse mortgages through its Home Equity Conversion Mortgage (HECM) program. The insurance guarantees that borrowers will have access to funds even if the lender has financial difficulty. Also, lenders are guaranteed that they will be repaid in full when the home is sold. (For more information about the HECM program, see our article Reverse Mortgages for Retirees and Seniors.) (There are other types of reverse mortgages as well, such as proprietary reverse mortgages, which are private loans backed by the companies that develop them.)
A reverse mortgage is different from a traditional mortgage in that it does not require the borrower to make monthly payments to the lender to repay the loan. Instead, loan proceeds are paid out to the borrower according to a plan. The borrower can choose to receive a:
- monthly payment
- line of credit, or
- lump sum (with a HECM, you are limited to 60% of the loan amount during the first year after closing in most cases).
You can also get a combination of monthly installments and a line of credit.
There are no restrictions on how the money received from a reverse mortgage can be spent. For example, the borrower can use the money to supplement his or her monthly income, pay other debts, or hire in-home help.
However, once a triggering event occurs, the loan becomes due and payable.
When Does a Reverse Mortgage Become Due and Payable?
A reverse mortgage loan becomes due and payable when one of the following circumstances occurs:
All borrowers have died. When this happens, the heirs have several options. They may choose to:
- repay the loan and keep the property (generally, with a HECM, the heirs may pay the lesser of the mortgage balance or 95% of the current appraised value of the home)
- sell the property (for at least the lesser of the loan balance or 95% of the fair market value of the home in the case of a HECM) and use the proceeds to repay the loan
- deed the property to the lender, or
- abandon the property and let the lender foreclose.
(If you take out a HECM and have a non-borrowing spouse, your spouse may be able to remain in the home after you die, and the loan repayment will be deferred, so long as certain criteria is met. The rules are different depending on whether you took the loan out before or after August 4, 2014. Learn more in Nolo’s article New Rule – Spouses Not Named on Reverse Mortgages Are Protected From Foreclosure.)
The property is sold or title to the property is transferred. If the home is sold or title transferred, the loan becomes due and payable. Generally, if the property is sold, the escrow company will accept the purchaser’s money and pay off the reverse mortgage along with any other liens on the property. If there are surplus funds, they will be distributed to the seller.
The borrower no longer uses the home as a principal residence. The homeowner can typically be away from the home (for example, in a nursing home facility) for up to 12 months due to physical or mental illness; however, if the move is permanent, then the loan becomes due and payable.
The borrower fails to meet the obligations of the mortgage. For example, the terms of the mortgage will require the borrower to pay the property taxes, maintain adequate homeowners’ insurance, and keep the property in good condition. If the borrower does not pay the property taxes or homeowner's insurance, or if the property is in disrepair, this constitutes a violation of the mortgage and the lender can call the loan due. (The lender must allow the borrower to cure the default to prevent or stop a foreclosure.)
After the Loan Becomes Due and Payable
Once the loan becomes due and payable, the borrower owes the lender:
- the amount of money the lender has disbursed to the borrower, plus
- interest and fees accrued during the life of the loan.
To avoid a foreclosure, the borrower must
- correct the default
- pay off the debt
- sell the property for at least 95% of the appraised value with the net proceeds of the sale to be applied towards the mortgage balance (or an heir may satisfy the debt by paying 95% of the current appraised value), or
- deed the property to the lender.
No Deficiency Judgments
When a lender forecloses on a mortgage, the total debt owed by the borrower to the lender sometimes exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a deficiency.
Example. Say the total debt owed is $200,000, but the home only sells for $150,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the lender can seek a personal judgment against the borrower (or the borrower’s estate) to recover the deficiency. To learn more about deficiency judgments, see our Deficiency Judgments After Foreclosurearea.
However, deficiency judgments are not allowed with reverse mortgages.
For More Information
For more information about reverse mortgages, go to www.aarp.org/revmort. To learn more about the HECM reverse mortgage program, go to www.hud.gov and enter "HECM" in the home page search box to find a long list of relevant links.