reverse mortgage foreclosures

The basics of reverse mortgage foreclosures

When a reverse mortgage ends the way it’s designed, loan repayment is due when the homeowner(s) no longer need the house in which they’re living. Typically that occurs when the borrower(s) dies or wants to move out of the home for a variety of reasons.

Since there are no monthly payments to make, reverse mortgage borrowers cannot default on the loan itself. But they can put themselves in a foreclosure situation if they do not pay property taxes, homeowners insurance, or utilities, or they don’t maintain the property to proper standards. All reverse mortgages require the homeowner to stay current on these expenses.

How a reverse mortgage foreclosure works

A reverse mortgage foreclosure is a legal process whereby the company that owns the reverse mortgage loan obtains ownership of the property to satisfy the debt.

The first step is for the lender to provide a notice of foreclosure. The document will state that you are delinquent or in default on the terms of the reverse mortgage agreement. The notice will likely provide a deadline for you to satisfy the loan requirements.

At this point, you still have several options other than losing your home. The most obvious are to pay up your taxes or insurance, or fix whatever is causing the loan to be in default. If you have money in savings or retirement accounts, valuables you can liquidate, or resources you can borrow from family members, you can use those assets to bring your loan back into good standing.

Upon receiving a reverse mortgage foreclosure notice, one of your first steps should be to seek the help of a a reverse mortgage foreclosure prevention counselor. A counselor approved by the U.S. Department of Housing and Urban Development (HUD) can help you review your options and determine the best course of action. There is no charge for counseling.

Reverse mortgage foreclosure options

Some of the options that you may be presented with when facing a reverse mortgage foreclosure include:

Sell your home. If you’re having trouble keeping up on taxes and insurance, then continuing to live in the house may not be the best option. If you’re fortunate to still have some equity in the home, then you can sell it, pay off the reverse mortgage and delinquent debts, and still have enough left over to start fresh.

If you have an FHA-insured Home Equity Conversion Mortgage (HECM), and if the home is worth less than the loan balance because it declined in value, then the amount due is equivalent to 95 percent of the appraised value; neither you nor your heirs will not have to pay the full loan balance. The FHA insurance will cover the difference.

If it’s possible, you could sell your home to a family member and rent it from them, using the sales proceeds to repay the reverse mortgage and other costs.

Refinance the reverse mortgage. This is also a possibility provided you have sufficient equity. You can replace your existing reverse mortgage with another one. Your new principal limit will be based on your age, current interest rates, and the value of your home minus the balance on your reverse mortgage and the total of your delinquent taxes and/or insurance. If you had difficulty paying property taxes and/or insurance on the first contract, you’d likely be required to set aside part of your available principal to cover those costs, which will reduce how much is available to you.

Another option is a deed-in-lieu of foreclosure. This involves a voluntary transfer of the property to the lender in exchange for a release from the reverse mortgage contract. This is a good option if you know your home will not sell for an amount large enough to cover the loan balance on the reverse mortgage. Although you will have to move out of the home, you won’t have the burden of trying to sell it or trying to generate the funds needed to stay out of foreclosure.

Actions you shouldn’t take include ignoring the foreclosure notice or abandoning the property. As long as the reverse mortgage remains in effect, loan interest will continue to accrue, and you are still responsible for taxes and insurance. It’s best to address the reverse mortgage foreclosure as quickly as possible.

Even if facing a foreclosure, one positive aspect of reverse mortgages is that they are non-recourse loans. If the borrower defaults, the lender can only claim the property that is securitizing the loan; that is, the house from which the reverse mortgage was obtained.

If the borrower defaults on the mortgage, the lender can seize the home and sell it to recover the loan balance. But if the property does not cover the balance of the reverse mortgage, the lender cannot seize other assets from the borrower to make up the difference. The lender, in effect, has no recourse to claim anything other than the house to collect the loan proceeds.