A reverse mortgage can be a powerful tool for an American senior aged 62 or older to create a new source of cash flow from his or her home equity.
With a Federal Housing Administration-insured Home Equity Conversion Mortgage (HECM), the borrower still retains ownership of the property while continuing to live there over the course of the loan. He or she is not required to make monthly mortgage payments during that time.
Reverse mortgages are often misunderstood, and a common misperception is the idea that in a reverse mortgage “the bank takes the home.”
On the contrary, if the loan terms are met by the borrower, that borrower maintains ownership of the home throughout the entire course of the loan.
The loan balance grows over time and when the borrower moves or passes away, the borrower and/or his estate is responsible for repayment of the loan.
However, there are still events that can lead to a borrower defaulting on the loan, which can in turn lead to foreclosure resulting in you losing your home.
This article will detail those events.
Reverse mortgage protections
In a reverse mortgage, monthly mortgage payments are not required as is the case with traditional forward loans.
However, the borrower is responsible to maintain payment of property tax, homeowner’s insurance, and property maintenance to FHA standards.
Several borrower protections implemented in recent years have greatly reduced the number of reverse mortgage defaults resulting in foreclosures.
These protections include:
- Reverse mortgage counseling
- Non-borrowing spouse protections
- A financial assessment and set asides for some loans
5 Ways to Default on a Reverse Mortgage Loan
Keeping up with all property taxes and insurance fees is among the most important borrower obligations in a reverse mortgage.
While borrowers do not face monthly mortgage payments, they are still responsible for property tax and maintaining insurance on the home.
1. Failure to maintain property charges
If a reverse mortgage borrower were to default on payment of property taxes, then in addition to contending with the local government over non-payment, the reverse mortgage is also at risk of being called due and payable.
Property taxes must be paid on time to keep the loan in good standing, because if taxes go unpaid, then the taxing authority would have the right to place a lien on the home because of it.
This puts the reverse mortgage lender at risk since a reverse mortgage takes the first-lien position on the home.
Some localities offer resources for borrowers if they have difficulty paying their property taxes.
For instance, several states allow the deferment of property taxes (though they will still have to be repaid later), and others offer assistance programs specifically designed to help a homeowner cover their property taxes.
Resources about some of these programs can be found on the website of the Consumer Financial Protection Bureau (CFPB).
2. Failure to maintain homeowners insurance
Similar reasoning applies to the necessity for keeping up with homeowner’s insurance.
At the end of the day, reverse mortgage lenders want to avoid as much risk as possible, so homeowner’s insurance is a requirement of all reverse mortgage properties.
3. Failure to maintain home in reasonably good condition
Reverse mortgage borrowers are responsible for keeping their homes up to FHA standards.
This means that if the home falls into disrepair, this can trigger a foreclosure action and force you, as the borrower, to leave the home.
There are a few specific requirements that if not met, could lead to a default event and eventual foreclosure if the default is not resolved.
4. Failure to occupy your home as a primary residence
if you move or sell your home, your loan becomes due and payable.
According to the terms of a reverse mortgage, the home you are borrowing against must remain as your primary residence for the life of the loan.
Therefore, most reverse mortgage companies advertise that you can remain in your home without making monthly mortgage payments either until you move out, or you pass away.
If you move out of the home and a routine occupancy check determines that you no longer reside in it, then the reverse mortgage servicer is going to ask for the loan to be repaid.
If it is not repaid, the lender may initiate a foreclosure action to satisfy the loan repayment.
If you move or leave the home and do not maintain primary residence there, then the servicer can call the loan due and payable.
5. Non-borrowing spouses must be disclosed to gain protections.
Similarly, if you – as the primary borrower – pass away before your spouse, and the spouse is not listed on the loan as either a co-borrower or non-borrowing spouse, then that spouse could end up facing a foreclosure action.
Recent years have seen new protections instituted for the non-borrowing spouses of reverse mortgage borrowers, but it is always advised that an affected couple inform the lender and servicer of everyone involved in the transaction at every possible step of the process.
Be sure to bring up any concerns about foreclosure with your loan originator and counselor so that they can sufficiently answer all of your questions, and so you know what you have to do in order to keep your reverse mortgage in good standing.
You can lose your home in a reverse mortgage if:
- You leave the home
- For six months or more out of a year for a non-medical reason
- For 12 consecutive months
- You pass away and your remaining spouse is not listed as a borrower or non-borrowing spouse
- You do not keep up with property taxes
- You fall behind on homeowner’s insurance payments
- You allow the home to fall into disrepair