Foreclosure of Reverse Mortgages

With a reverse mortgage, an older homeowner can use the equity in their home to get cash. But taking out this type of loan is often a bad idea.

Reverse mortgages are complicated, come with extensive restrictions and requirements, and under many different circumstances, can be foreclosed.

Types of Reverse Mortgages

The Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD), insures almost all reverse mortgages through its Home Equity Conversion Mortgage (HECM) program. This insurance protects the lender, not the borrower. It guarantees that the lender will be repaid in full.

Other types of reverse mortgages exist, too (they're called "proprietary reverse mortgages"), which are private loans backed by the companies that develop them.

When Does a Reverse Mortgage Become Due and Payable?

Once a triggering event occurs, the reverse mortgage loan becomes due and payable. This means that the total amount of money the lender has disbursed to the borrower, plus interest and fees accrued during the life of the loan, must be repaid. Otherwise, the lender will foreclose.

A HECM 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
• let the lender foreclose.

If you take out a HECM and have a nonborrowing spouse, your spouse might be able to remain in the home after you die, and the loan repayment deferred, so long as certain criteria are met. The rules are complex and different depending on whether you took the loan out before or after August 4, 2014.

The Property Is Sold or Title to the Property Is Transferred

The loan becomes due and payable if the home is sold or the title is transferred. 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.

But if you transfer ownership of the home, for example, to a relative, the loan becomes due and payable.

The Borrower No Longer Uses the Home as a Principal Residence

With a HECM, if the property ceases to be the principal residence of the borrower for reasons other than death and the property is not the principal residence of at least one other borrower, the loan becomes due and payable.

To resolve the debt, you can correct the matter, pay the balance in full, sell the home for the lesser of the balance or 95% of the appraised value and put the proceeds toward paying off the loan, or complete a deed in lieu of foreclosure. Or else the lender will foreclose.

The Borrower Fails to Occupy the Home for Longer Than 12 Consecutive Months Because of a Physical or Mental Illness

With a HECM, the borrower can be away from the home—for example, in a nursing home facility—for up to 12 consecutive months due to physical or mental illness; however, if the absence is longer, and the property is not the principal residence of at least one other borrower, then the loan becomes due and payable. (Some nonborrowing spouses of reverse mortgage borrowers can remain in the home after the borrower moves into a long-term care or another healthcare facility.)

Again, to resolve the debt, you can correct the matter, pay the balance in full, sell the home for the lesser of the balance or 95% of the appraised value and put the proceeds toward paying off the loan, or complete a deed in lieu of foreclosure. Otherwise, the lender will foreclose.

The Borrower Fails to Meet the Obligations of the Mortgage

The mortgage terms will require the borrower to pay the property taxes, maintain adequate homeowners' insurance, and keep the property in good condition. (In some cases, the lender might create a set-aside account for taxes and insurance.)

Not paying the property taxes or homeowners' insurance or letting the property fall into disrepair constitutes a violation of the mortgage, and the lender can call the loan due. The lender must usually allow the borrower to cure the default to prevent or stop a foreclosure.

No Deficiency Judgments

When a lender forecloses, the total debt that the borrower owes 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 mortgage debt owed is $500,000, but the home sells for $450,000 at a 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 after a foreclosure. But deficiency judgments aren't allowed with HECMs.

For More Information

Before getting a reverse mortgage, you should understand how they work and learn the associated risks and requirements. A good place to start is www.aarp.org/revmort. You also need to watch out for reverse mortgage scams.

Reverse mortgages are complex, and even after attending a required counseling session before getting a HECM, many borrowers still don't completely understand all the terms and requirements of this kind of loan. It's also highly recommended that you consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out a reverse mortgage.

If you need help avoiding a foreclosure, consider talking to a foreclosure attorney.