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Hello Arlo, I have a few questions. 1. Can a bank force maintenance on a home or foreclose if the owner is unable to make major repairs? 2. Will the bank come after the owner for the remaining loan amount if the loan value is higher than the actual sale amount? 3. Will Banks ever take a lower payoff amount for a property that is clearly and significantly worth less than the loan value?

By Dan on 11.16.2018

Every loan agreement includes a stipulation obliging the borrower to maintain the property adequately. This is crucial because the lender needs assurance that the collateral securing the loan—the home—is being kept up.

Should the property's condition deteriorate to a point where it compromises the lender's security, they have the right to intervene and may ultimately resort to foreclosure as a last resort. However, lenders generally avoid taking such drastic measures as they prefer not to manage properties directly and will intervene only when necessary.

A reverse mortgage stands out as a non-recourse loan, meaning the borrower (or their heirs) will never owe more than the home's market value at the time of settlement, and the lender cannot pursue repayment from any other assets owned by the borrower or their heirs. Additionally, the loan terms do allow for a settlement where the payoff amount can be less than the total debt owed under certain conditions.

For instance, should the borrower pass away, and the heirs decide to retain the property, yet its value is less than the outstanding loan balance, HUD permits a payoff at 95% of the home's current market value, provided this amount is lower than the debt. This concession, however, does not apply if the borrower is alive and chooses to settle the loan prematurely; in such cases, HUD expects the loan to be paid in full.

When the borrower must move into permanent assisted living or pass away, the timing is beyond anyone's control, and HUD's rules reflect this. Conversely, a full repayment is necessary if the property is sold or the loan is settled out of convenience. Potential increases in property value over time might bridge any gap between the loan balance and the property's worth. Departing from the property without settling the debt might lead to a loss for HUD, but the repercussions extend beyond losing the home—it could also affect eligibility for future HUD or government-insured financing and have tax implications.

It's crucial to consult with a tax advisor to understand these potential tax implications fully, as I'm unable to provide tax or legal advice. This professional guidance will ensure you make informed decisions regarding your reverse mortgage and its impact on your financial well-being.

Also See: Reverse Mortgage Property Requirements (Updated 2024)

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