In certain circumstances, a reverse mortgage might be a good way to prevent a foreclosure. Read on to learn more about how reverse mortgages work, how obtaining a reverse mortgage can stop a foreclosure, and whether or not a reverse mortgage might be appropriate in your situation.
(For more articles on reverse mortgages, visit our Reverse Mortgages: Foreclosures & Scams topic page.)
How Reverse Mortgages Work
With a reverse mortgage, homeowners are able to tap into the equity in their homes to provide cash to help meet expenses or pay off debt. The most readily available reverse mortgage is the FHA's Home Equity Conversion Mortgage (HECM).
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 as a monthly payment, line of credit, or a lump sum (subject to some limitations). You can also get a combination of monthly installments and a line of credit. The amount of the loan is based on the equity of the house.
Reverse mortgages are only available for homeowners who are:
- 62 years of age or older
- occupy the property as a principal residence, and
- own the home outright or have significant equity in the home.
The reverse mortgage loan generally becomes due and payable when the borrower:
- sells the property
- permanently moves out (for example, to a nursing home)
- does not meet the obligations of the mortgage (such as paying taxes and insurance), or
For more information about reverse mortgages, see Reverse Mortgages for Retirees and Seniors.
Using a Reverse Mortgage to Stop a Foreclosure
If you are struggling to make mortgage payments and are facing foreclosure, taking out a reverse mortgage to payoff the existing mortgage debt may be one way to prevent the loss of your house. Once the lump sum is fully disbursed to the mortgage holder, this will eliminate monthly mortgage payments and the homeowner is free to remain in the home.
Example. Mrs. Smith is an 85-year-old widow who previously refinanced her home with a subprime loan. Mrs. Smith is having trouble keeping up with the mortgage payments due to a very high interest rate. Mrs. Smith attempted to negotiate a loan modification with her lender, but was not able to achieve an affordable monthly payment. She then decided to look into a reverse mortgage. By getting a reverse mortgage, Mrs. Smith is able to use the proceeds from the reverse mortgage to satisfy the prior mortgage. As a result, Mrs. Smith is able to stay in her home.
Downside to Using a Reverse Mortgage to Stop a Foreclosure
The major downside to reverse mortgages is that you will lose some or all of the equity you have built up over the years when the debt becomes due. If you plan to move out of your home at some point, you won't have any equity to cash in. Nor will you have equity to leave to your heirs.
Also, while reverse mortgages require no monthly mortgage payments, borrowers remain responsible for paying:
- property taxes
- hazard insurance premiums
- homeowners' association fees
- mortgage insurance, and
- home maintenance costs.
In some cases, homeowners end up defaulting on the loan when they can’t afford the taxes, insurance, and upkeep, which then leads to foreclosure. In fact, an increasing number of reverse mortgage defaults has caused the FHA to revamp its reverse mortgage program. (Learn more in New Restrictions on Reverse Mortgages.)
(Learn more about the foreclosure of reverse mortgages.)
Other Options to Avoid Foreclosure
A reverse mortgage is only one option for distressed homeowners. It is highly recommend that you proceed cautiously if you are thinking about taking out a reverse mortgage. A reverse mortgage may not be best for your situation if you plan to move out of the house at some point or want to leave property to your heirs.
If you are having trouble making your mortgage payments, you are encouraged to contact your lender or loan servicer directly to inquire about other foreclosure prevention options that may be available.
(To learn about HAMP and other government programs for distressed homeowners, visit Nolo's Government Foreclosure Prevention Programs area.)
(To get information about options to avoid foreclosure, see our Alternatives to Foreclosure area.)
More Information on Reverse Mortgages
If you are thinking about taking out a reverse mortgage to prevent a foreclosure, be sure that you know the risks and watch out for reverse mortgage scams. (Learn more in our article Reverse Mortgage Scams.)
For more information on reverse mortgages, visit the AARP’s reverse mortgage webpage at www.aarp.org/revmort.