Facing a Reverse Mortgage Foreclosure? Here Are Your Options.

May 28, 2023

Hello Arlo, My mother passed away a year ago. She had taken a reverse mortgage on her home. We later discovered that my mother had not been paying her property taxes, and her home had now been foreclosed. Will they auction the home off? And exactly where do the proceeds of the auction go? If the home sells in auction for more than the reverse mortgage amount. Then where does the rest of the money go? My mother’s home is valued at approximately $250.000. I’m not sure, but I think my mother only received approximately $40,000-$50,000. That’s $200,000 over the loan amount. Do those funds go to my mother’s estate/heirs? Thank you so much!

Hi Karen,

There are several possibilities at this point, and you may need to act quickly to protect the estate/heirs depending on where things stand. If the lender has already completed a foreclosure sale and they or some other entity now owns the property because of that sale, your actions are not as urgent, but if not, there is still time. Let me explain.

The lender will initiate foreclosure proceedings when the last original borrower on the loan passes, and no original borrowers are still living in the home. They can also initiate foreclosure proceedings if they must advance funds to pay property taxes or other property charges (i.e., homeowner’s insurance, etc.).

If the lender has already foreclosed

If the lender forecloses on a home and it goes to sale, it begins the foreclosure sale with the initial bid at the amount that is owed to the lender, which would include all money borrowed, interest, MIP owed, any financed fees, any money advanced on behalf of the borrower (taxes, etc.) and any fees that accrue which would include the costs to foreclose.

For example, if mom only borrowed $50,000 and those fees and costs plus taxes and insurance the lender advanced all total another $25,000, the starting bid at foreclosure auction would be $75,000. The lender is not allowed by law to bid again at the auction. If no one bids against the lender’s opening bid, the lender wins the auction and becomes the property owner by Sheriff’s Deed (or whatever instrument is used in the state where the property is located).

If others bid higher, the lender would be out of the auction but would first be paid from the sale proceeds before the estate (assuming the title to the property is still in Mom’s name) would receive the remaining funds over what was owed to the lender. If the next highest bidder only went as high as $100,000, then the estate would only receive $25,000.

If the home has not yet gone to foreclosure sale

If the loan is in default but has yet to go to sale, you can still step in, repay the amount owed, and retain the property. But you may need to act quickly depending on the default status. I recommend that you obtain the services of an attorney who handles such matters to see if you can get a stay in the foreclosure action and find a way to pay off the loan before the foreclosure sale.

If there is $200,000 equity in the property, there is certainly motivation to do anything in your power to halt the proceeding and pay that loan off so you can either keep the home or sell it yourself so the estate (you) can keep the equity. You would need to do something as soon as possible to change the title or begin probate anyway, but I am not sure.

An attorney will need to advise you regarding that matter. I suggest you contact the lender, give them documentation that you are the heir if you have not already done so, and tell them you wish to repay the loan and want your options. That will at least start things moving and get you a loan payoff figure.

I would not wait until after a foreclosure sale to hope that funds are still available, but if I knew there was substantial equity in the home. And the attorney will need to let you know if there are ways to slow down or stay a foreclosure sale so you have more time if needed. Consider a sale of the home yourself, which might take time to change the title and a probate action through the court.

Still, it would be worth the time and effort when considering the amount of money you describe, and the attorney can tell you if and how that could be achieved.

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10 Comments on this Article

Israel
October 11th, 2023

Hi Arlo,

My mother in law and wife inherited my grandmother's house that has a reverse mortgage. My wife and I have the ability to refinance it, but the house is still pending the probate (Dec 2023) the reverse mortgage company does not want to give an extension to the probate day (there is one previous extension). What are the current options?
Reply to Israel
- Michael Branson
  October 11th, 2023
  
  Hello Israel,
  
  Most lenders are only willing to allow the time needed to complete the transaction as long as they see the refinance progressing. What is the status of the refinance? Have you applied, and do you have a loan commitment from a lender yet? The reverse mortgage lender will not issue indefinite extensions, and if there is no finite end date, they may be unwilling to continue to wait forever. If they granted one extension already, they either knew it would not be adequate to complete the probate and refinance or were not given the accurate dates to complete the actions.
  I don't know what information they had or what has transpired, but if they were initially given the probate information and knew that the probate would not be finalized until December, I would suggest you put a package together for them that includes the probate information once again, the loan approval for the refinance of the loan and request the extension again. However, if you initially gave them an earlier date and then you plan to look for financing later and expect them to wait again while you start obtaining financing at that time, you may find that they are not willing to wait to file the notice of default.
  
  Remember. It still takes a while to foreclose, even after a notice of default has been filed. If the lender feels that things are being drawn out and that you are not ready to pay the loan off any time soon, they may start the process so that they do not have to wait and start a foreclosure that could take another 6 months or more later if you are unable to complete the loan payoff at that time. It is better for you to get the extension if you can, because it will save foreclosure costs, so I would strongly recommend that you have the documentation to show that the probate and new loan are all ready to proceed in December and then request the extension of the lender with that information.
  Reply to Michael
Larry S.
September 29th, 2023

Hello Arlo,

My Mother passed away with a reverse mortgage. The family did a walk away. The bank eventually sold the home. There is money left after the debt is satisfied. She had no will. We have not heard or received anything showing the debt was satisfied, and the family is due the remaining funds. It's been several months since the home was sold.
Reply to Larry
- Michael Branson
  September 29th, 2023
  
  Hello Larry,
  I'm not sure what you mean when you say there is money left after the debt is satisfied. When you leave the property, the lender obtains title through foreclosure. The only way there would be money available after a foreclosure sale would be if someone bid higher than the lender's opening bid at the foreclosure sale, and then anything that the house sells for above the amount owed belongs to the borrowers' estate or heirs (which includes any costs the lender incurs to foreclose plus any money they advance on behalf of the borrower, if any). Foreclosure bidding is an auction that starts at that amount owed. If no one bids higher, the lender wins and becomes the property owner. If someone outbids the lender, the lender cannot bid again and is paid from the sale proceeds.
  If the auction price was greater than the amount owed, those funds should have already been paid to the estate or the heirs. Is that what you are referring to? The only other money you may be referring to when you say there was money left is that she had remaining funds that she had not used on her line of credit. If you are referring to that, you will not receive a payout of the remaining line. That amount represents unborrowed funds; just because she did not use them, the lender does not pay them to the family upon the borrower's death.
  The funds in the line of credit are approved and there for her to use, and she doesn't begin to accrue interest on those funds until she borrows them. But if she never does, they do not need to be repaid and are certainly not paid out to anyone else later. Think of them like a credit card with a $20,000 credit line that she had only charged $1,000 on. The bank would not give the family the remaining $19,000 because that's how much she had left on the line when she passed. It's just money that was never used and does not need repaid.
  In your case, you said you walked away from the home (presumably because the equity position made a sale undesirable). You and the estate will never be required to pay for any shortfall for which the home ultimately sells or any losses, but there will be no further payments from that loan to anyone after the borrower passes.
  Reply to Michael
RB
August 27th, 2023

Hi Arlo,

I bought a property at an HOA foreclosure. The property was subject to the HECM reverse mortgage. After the foreclosure, HUD expressed interest in redeeming me. But the redemption period has passed, and they have not redeemed. The property's owner(and borrower) had conveyed it back to HUD 2 years ago as they had to move to a care home. Still, the HUD servicer had yet to accept the conveyance (it looks like servicer error). HUD continued to pay the taxes but missed paying the HOA(hence the foreclosure). Is there any reason that the lien can be nonenforceable? Or can I force HUD to short sale to me since I have an active interest in the property?
Reply to RB
- Michael Branson
  August 27th, 2023
  
  Hello,
  This would be a question for a real estate attorney practicing in the state where the property is located. I recommend you seek legal advice. This is a legal question and may depend on the state's laws. I am unaware of anything that would make the prior lien of the lender unenforceable. I have an explanation for the refusal of the lender/HUD to accept the conveyance you describe. Still, without all the facts, it is only a theory on my part. The legal documents for the loan state that the lender's failure to enforce any provisions at any time is not a waiver and that they can be enforced later, but remember, the lender is under no obligation to accept a conveyance. Sometimes, doing so is outside the lenders' or HUD's best interest. If the borrower conveyed or deeded the property back to the lender (typically a Deed in Lieu of Foreclosure) and the lender accepted it, there would be no need for the foreclosure. There could be reasons, though, that the lender/HUD would not accept the Deed in Lieu.
  When a lender accepts a Deed in Lieu of Foreclosure from a borrower, if there are any existing liens, etc., the lender would "inherit" those liens and become responsible. On the contrary, any junior liens are removed during a foreclosure (unless a junior lienholder cured the default of the senior liens and foreclosed on the property themselves). To accept a Deed in Lieu of Foreclosure, lenders and HUD require a property to be "broom clean," free of all personal property and all other liens. If the property did not meet all of these requirements when the owner offered to return the property, they would not accept a Deed from the borrower. Instead, they would insist that the property go through foreclosure so that they could legally remove all other liens and personal property from the home without incurring liability for those liens or property. While I have no way of knowing if this might be why they did not accept any Deeds offered to them, it is usually why we find out that the Deed in Lieu of Foreclosure was not accepted. It does not violate any portion of the contract or any laws. That may be what happened in the case of the borrowers who owned your home before you.
  Regarding HUD offering the redemption to you, I have yet to gain personal knowledge about such matters. I can only repeat what I read on the HUD website. HUD outlines the redemption period on its website, stating that a redemption period is a period after a home has already been sold at a foreclosure sale (meaning HUD or a third-party purchaser at the foreclosure sale now owns the property subject to the right of the homeowner to redeem) where a homeowner may still reclaim their home. HUD states that many states have some redemption period on their website and depend on state laws (https://www.hud.gov/topics/avoiding_foreclosure/redemption). Since HUD is still involved, it was HUD, in this case, who became the owner at the Foreclosure sale. HUD states that to reclaim the home, you must pay the outstanding balance plus all costs incurred during foreclosure.
  I would certainly see what they are asking, and if the amount is over the current market value of the home, try to get them to lower it to no more than 95% of the current value of the home, but that might be the best they are willing to lower since that is the same price they are willing to accept from heirs. They know if they must sell the home, they will not get more than this on the open market. Their loan has always been due and payable since the borrower permanently left the property. The fact that they say they will let you redeem the property doesn't sound much different than purchasing a property known as Real Estate Owned (REO) or HUD REPO unless that redemption cost is less than the current market price.
  I can tell you this: HOA actions have been a huge financial disaster for many people. They look so attractive people think they are getting a unit at a very low price only to find out after they purchase the property that there is another loan or loans, often a reverse mortgage, on the unit about which they knew nothing and the combination of the delinquent HOA dues and the other lien balance(s) meets or exceeds the unit's value in many cases. We have written about this many times and recommend that everyone do a title search before buying any property at auction so you are not hit with any surprises later. Even if these are the circumstances for your situation, I still recommend that you contact an attorney because I cannot give you legal advice to determine what, if any, recourse you have (and again, I am only guessing at the circumstances because I do not have all the information).
  Reply to Michael
Brenda M.
June 17th, 2023

Hi Arlo,

My mom passed in 2021. She had a reverse mortgage, and we let the company know. They let the property go into foreclosure, and it just sold. Now we have different companies calling, saying we have money owed to us from selling the property. Could that be true since there was a reverse mortgage? I don't want to take the money and then have to pay it back to the bank.
Reply to Brenda
- Michael Branson
  June 17th, 2023
  
  Hello Brenda,
  It is entirely possible. The opening bid is from the lender when the property sells at a foreclosure sale. It is for an amount equal to the outstanding balance of the loan plus all interest, any fees owed, and any money the lender had to advance on behalf of the borrower. If no one bids higher than the lender's opening bid, the lender becomes the new owner, and there would be no money left over for the borrower or the borrower's estate/heirs if the borrower had passed. However, if the property sells for a higher price than the amount owed at the sale, all funds above and beyond what is owed to the lender still belong to the property owner or, if that owner had passed, their estate/heirs. If you have people contacting you, the foreclosure sale may have been for a greater price than what was owed on the loan.
  Just because your mom had a reverse mortgage doesn't mean she didn't still own the property. When she passed, any equity in the home still belonged to her and would be passed to her heirs or as she directed. I sincerely hope you did not walk away from the equity in the home because you felt that someone else owned the home. Many people mistakenly believe the lender owns the home, which is not true. Like any other loan, the lender has a lien on the property to protect them from the funds they loaned. Still, the borrower owns the home, and any equity in the home belongs to the borrower.
  Usually, when others bid on foreclosure sales above a lender's opening bid, it is because the price is very attractive and well below the home's actual value. Investors are constantly looking for foreclosure sales where they can purchase properties way below their actual value because the lender cannot raise their bid once they have been outbid. They start the sale at the amount owed, and then once someone has outbid them, they are out of the auction from that point. The only way the new bidder can be outbid at that point is by another individual who recognizes the home's value and wants to buy the home at auction. This can drive up the sales price. Still, it is usually less profitable to the person who lost their home to foreclosure or their heirs than if they could sell the home themselves, as investors won't typically bid the price up to the current market value. They are looking for an excellent deal at the auctions, and if the price of the home starts to approach actual value, the home could be more attractive for their purposes.
  You may have been much better off if you had sold the home and paid the loan off with the proceeds, but it is too late now. As it is, if there is money available from the sale of the home, you certainly should claim the funds. You would not be required to pay them back as the sale proceeds above and beyond what was owed to the lender belonging to your mom's estate and now her heirs (presumably, you).
  Reply to Michael
Mary
June 7th, 2023

Hi Arlo,

My husband's mom died, and she had a reverse mortgage. My husband could not get a loan to purchase the property and pay off the reverse mortgage. The home was foreclosed and sold this past April. My husband lives in the property and has been served papers to vacate, but he's still trying to fight the foreclosure. Does he have any right to remain in the home?
Reply to Mary
- Michael Branson
  June 7th, 2023
  
  Hello Mary,
  Now you are talking about property foreclosure rights under the state's laws, which can vary depending on the state and the circumstances. First, I would disclose that I can give no legal advice under the laws regulating lenders. Still, as someone with over 45 years of experience, the time to seek legal help is usually before the lender completes a foreclosure action. You must assert your rights before the title is granted to the lender on a foreclosure action. However, I suggest contacting a licensed real estate attorney as quickly as possible to determine what rights he still may have, if any, before any pertinent deadlines pass. There may also be legal steps the attorney can advise you to take to block any additional moves the lender would make to evict, but only the licensed attorney can tell you if that is possible.
  Reply to Michael

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