Using a Reverse Mortgage to Prevent Foreclosure

For homeowners 62 and over, a reverse mortgage could help avoid foreclosure. But it's usually not the best option.

By , Attorney · University of Denver Sturm College of Law

In some 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.

Using a Reverse Mortgage to Stop a Foreclosure

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 pay off 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 payment 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 has 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 could not get an affordable monthly payment. She then decided to look into a reverse mortgage. By getting a reverse mortgage, Mrs. Smith can use the proceeds from the reverse mortgage to satisfy the prior mortgage. As a result, Mrs. Smith can stay in her home.

When Is a Reverse Mortgage Due?

But the reverse mortgage loan will become due and payable when the borrower:

  • sells the property
  • permanently moves out (for example, to a nursing home for more than 12 months)
  • doesn't meet the obligations of the mortgage (such as paying taxes and insurance), or
  • dies.

When one of these events happens, the loan has to be repaid, or the lender will foreclose.

Downsides to Using a Reverse Mortgage to Stop a Foreclosure

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.

Another downside is that the lender can call the loan due if you permanently move out, sell the home (or transfer title), or move out for over 12 months due to health reasons. Also, a reverse mortgage could affect your eligibility for Medicaid.

In addition, reverse mortgage 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. 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.

Consider Other Options

A reverse mortgage is only one option for distressed homeowners. If you're considering taking out a reverse mortgage, proceed cautiously.

Even though you'll have to complete a counseling session with a HUD-approved counselor if you want a HECM, you should 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, contact your lender or loan servicer directly to inquire about other foreclosure prevention options that might be available.

How to Get More Information on Reverse Mortgages

For more information on reverse mortgages, visit the AARP's reverse mortgage webpage at www.aarp.org/revmort and the Consumer Financial Protection Bureau's website. Search for "reverse mortgage."

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