In certain circumstances, a reverse mortgage might be a good way to prevent a foreclosure. But not typically. Reverse mortgages are risky and expensive, and are often foreclosed themselves.
If you're struggling to make your payments on a traditional mortgage and are facing foreclosure, taking out a reverse mortgage (the most popular type is the FHA Home Equity Conversion Mortgage or "HECM") to payoff the existing mortgage debt might 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 payments and the homeowner can 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.
But the reverse mortgage loan will become due and payable when the borrower:
When one of these events happen, the loan has to be repaid or the lender will foreclose.
One downside to reverse mortgages is that you will lose some or all of the equity you have built up over the years. If you plan to sell your home at some point, you might not have any equity left. Another downside is that you might also not have any equity to leave to your heirs. (To learn about options for your heirs and the obstacles they might face, see If I Get a Reverse Mortgage, Can I Leave My Home to My Heirs?)
Another downside is that the lender can call the loan due if you permanently move out, if you sell the home (or transfer title), or if you move out for over 12 months due to health reasons. Also, a reverse mortgage could also affect your eligibility for Medicaid.
In addition, reverse mortgage borrowers remain responsible for paying:
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. Reverse mortgage lenders are typically quick to start a foreclosure after a default happens.
Reverse mortgages are designed so that the lender gets paid back or gets ownership of the property. Even if you do everything you’re supposed to under the mortgage agreement, you probably won’t have money or equity left when the loan comes due and you’ll likely lose the home.
A reverse mortgage is only one option for distressed homeowners. It's highly recommend that you proceed cautiously if you're thinking about taking out a reverse mortgage. Even though you'll have to complete a counseling session with a HUD-approved counselor if you want to get a HECM, 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 this kind of loan.
If you're having trouble making your mortgage payments, you're encouraged to contact your lender or loan servicer directly to inquire about other foreclosure prevention options that might be available.