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 borrower meets the loan terms, 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 the 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 with traditional forward loans. However, the borrower is responsible for maintaining 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 is among a reverse mortgage’s most important borrower obligations. 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 the 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). Others offer assistance programs designed to help homeowners cover their property taxes.
Resources about some of these programs can be found on the Consumer Financial Protection Bureau (CFPB) website.
2. Failure to maintain homeowners insurance
Similar reasoning applies to the necessity of 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 your 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, your loan becomes due and payable. According to the terms of a reverse mortgage, the home you are borrowing against must remain 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.
The lender may initiate a foreclosure action to satisfy the loan repayment if it is not repaid. 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 protection.
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. Still, 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.
Can you lose your house with a reverse mortgage?
Do you have to pay the property taxes with a reverse mortgage?
What happens to a home with a reverse mortgage when the owner dies?
The loan becomes due and payable when the property owner and borrower on the reverse mortgage dies. At that time, the heir(s) will contact the loan servicer to communicate their plans with the property. The heir(s) can pursue one of several options depending on how much is owed on the property compared to its current value.
Heir(s) can sell the property to pay off the balance if the balance owed is less than the current value. Heir(s) can pursue a refinance with their loan to pay off the balance if they qualify. Heir(s) can pay off the balance with other funds such as life insurance or savings. Heir(s) can assign the home to the loan servicer if the amount owed is greater than the home’s current market value. In this scenario, the heir(s) are not obligated even to sell the property, and the servicer will sell the property. Additionally, if the heir(s) wish to keep the home, they can pay 95% of the current assessed value to keep the property. The mortgage insurance fund covers the loss as the reverse mortgage is non-recourse. You cannot owe more than the value of the property.
How many reverse mortgages end in foreclosure?
How can I stop a reverse mortgage foreclosure?
Summary – 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
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