With a reverse mortgage, homeowners use the equity in their homes to get cash. But this is not always a good idea. Under certain circumstances, reverse mortgages can be foreclosed. Read on to learn more about reverse mortgages and when the lender can foreclose.
Significant differences exist between traditional mortgages and reverse mortgages.
With a traditional, forward mortgage, the borrower qualifies for and borrows a large sum of money based on factors such as income, job history, and creditworthiness. 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. (Learn the basics about foreclosures and foreclosure procedures.)
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:
The Federal Housing Administration (FHA) insures almost all reverse mortgages through its Home Equity Conversion Mortgage (HECM) program. The insurance guarantees lenders that they will be repaid in full when the home is sold. 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:
You can also get a combination of monthly payments and a line of credit.
Once a triggering event occurs, the reverse mortgage loan becomes 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:
If you take out a HECM and have a non-borrowing spouse, your spouse might 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 Reverse Mortgages: Foreclosure Protections for Non-Borrowing Spouses.)
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 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. The borrower can be away from the home—for example, in a nursing home facility—for only 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. 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. (In some cases, the lender might create a set-aside account for taxes and insurance.) If the borrower does not pay the property taxes or homeowners' 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 usually allow the borrower to cure the default to prevent or stop a foreclosure. Though, reverse mortgage lenders are known for foreclosing on elderly homeowners for relatively minor mortgage violations.
Once the loan becomes due and payable, the borrower owes the lender:
To avoid a foreclosure, the borrower must generally (read your mortgage contract for specific details):
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 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.
However, deficiency judgments are not allowed with reverse mortgages.
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.
If you need help avoiding a foreclosure, consider talking to a foreclosure attorney.