Can I get a reverse mortgage while in Chapter 13 bankruptcy?

January 20, 2017

We are under chapter 13 bankruptcy would we be able to do a reverse mortgage? I am 64 my husband is 78

HUD has different requirements for the purchase program and someone who is doing a loan on their existing property. If your desire is to utilize the reverse mortgage for purchase program, you cannot have a bankruptcy for the previous 24 months prior to the loan.

If you are looking at doing a loan on your existing property, you can do a reverse mortgage, even if you are still in the Chapter 13 Bankruptcy but there are things you need to know.

Firstly, you must have been making on time payments under the plan established by the court for a minimum of 12 months. The court has to issue an approval for you to obtain the loan.

Finally, there is a good possibility that you may be required to have a full or partial Life Expectancy Set Aside (LESA) for your taxes and insurance depending on the issues surrounding the BK and your other credit profile.

If you are required to have the LESA, the lender is required to set aside funds from the reverse mortgage proceeds to pay your future taxes and insurance.

The amount required to be set aside for borrowers is dependent on whether it must be a full or partial LESA, the borrowers’ ages and the amount of your taxes and insurance.

The LESA is not a fee, but rather funds that are set aside and not made available to you to use for other purposes, the servicer will use them to pay taxes and insurance as they come due just like an impound account on a forward loan but because you make no payments on a reverse mortgage, the funds are set aside from the beginning for the future payments.

The funds are not considered “borrowed” until they are actually used or sent to the taxing authority or insurance company by the servicer and that is when that portion is added to your loan amount.

We have had borrowers actually request LESA’s even when not required of them because they liked the idea of not having to pay their taxes and insurance anymore both from the standpoint of convenience and cash flow.

The only real hitch is that if it is required, you have to have adequate funds available to you under the reverse mortgage to pay off any loans currently on the property, fund the LESA and still have the remaining proceeds to do what you want to do with the reverse mortgage loan.

Let us know and we can run the numbers for you to see if it will work out for your needs.

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10 Comments on this Article

Wanda R.
July 29th, 2022

Hello I filed for chapter13 bankruptcy in October 2022. I spoke to someone before about doing a reverse mortgage and they ran my info and said I had to wait a year and have an on-time payment history to be eligible for a reverse. I am 60 years old. Is this info correct?
Reply to Wanda
- ARLO™
  August 2nd, 2022
  
  Hello Wanda,
  
  Basically yes, but there is a little more to it than that. Borrowers with a Chapter 13 Bankruptcy can get a reverse mortgage while still in the Bankruptcy (while still in the payment period before all is final) provided they have at least one years on time payments pursuant to the schedule established by the court.
  They must also meet all of the other requirements laid out in HUD's financial assessment guidelines which include on-time payments of taxes, insurance and other property charges on your home and any other properties you may own. When you are in a Bankruptcy, you must get permission from the court to get a reverse mortgage.
  Also, the minimum age for a HUD HECM reverse mortgage is 62 so you would not be able to get the loan on the HUD program at age 60, even with a year's on-time payments.
  Reply to ARLO
Paul
May 16th, 2019

My daughter filed for bankruptcy, but my name is not on the case. Can I get a reverse mortgage on the property?
Reply to Paul
- ARLO™
  May 16th, 2019
  
  Hello Paul,
  Am I to assume that both you and your daughter share ownership of the house now and that you are thinking about taking sole ownership to avoid any BK entanglements? Or are you asking me if your daughter can Grant Deed her home to you and then you want to apply for a reverse mortgage?
  The reason I ask is because a bankruptcy is not an automatic reason for denial with a reverse mortgage. If your daughter also lives in the house, shares ownership and is also 62 and over, you may still qualify and it may be a better deal all the way around to keep her on the loan so that she is also protected for life under the terms of the loan.
  If this is the case, if something happened to you, she would be able to continue to live in the home for life as a borrower on the loan as well. If she is not 62, she would not be a borrower on the loan anyway. If you are not currently on title and have not been, your daughter cannot simply Deed the home to you in order to avoid credit issues expecting you to now obtain a reverse mortgage based on newly acquired title.
  If I am not understanding the circumstances correctly, please do not hesitate to contact us or even submit a follow up question with further parameters.
  Reply to ARLO
- Maryanne D.
  March 31st, 2020
  
  Is it possible to get a reverse mortgage if I filed for bankruptcy 9 years ago?
  Reply to Maryanne
  - ARLO™
    April 7th, 2020
    
    Hello Maryanne,
    
    A 9 year old bankruptcy will not even affect your ability to get a reverse mortgage. After 7 years it should not even be reported any longer on your credit report. HUD really keys in on your past 24 months credit history and as long as that is good, you should be fine. If there are credit issues within the past 24 months, it still does not mean that you cannot get the loan but it might mean that you need to explain those items and it could result in a need to set funds aside out of the reverse mortgage to pay taxes and insurance for the life of the loan, but we would not know that until we reviewed your credit and payment history, especially your payment of all property related charges in the past 24 months (mortgages, taxes, insurance, HOA payments, etc).
    Reply to ARLO
John A El-Amin
April 2nd, 2019

What happens if a homeowners files a Chap. 13 bk, while in a reverse mortgage agreement? Will the chap. 13 be considered an event that triggers foreclosure on the reverse?
Reply to John
- ARLO™
  April 2nd, 2019
  
  Hello John,
  
  Yes, it is possible to close a reverse mortgage while in a chapter 13 bankruptcy (BK) but there are additional steps you must take in order to meet the HUD requirements. Firstly, you must have a good letter of explanation for the BK. HUD understands that good people have issues that arise that are beyond their control. Loss of employment, death in the immediate family, illness or injury are all reasons that could make a borrower with previously acceptable credit have sudden circumstances that were beyond their control.
  Choosing to co-sign debts for a family member and that family member not paying their bills is a choice though and may not be looked at as positively. HUD also will be looking for patterns. If you have delinquent credit patterns prior to and since the BK, the BK is not typically the result of an incident or series of incidents that were beyond your control -it is usually an indicator of the way you handled your credit and it looks like it may have caught up with you. They will look at your mortgage and housing obligations.
  How have you paid your mortgage, taxes and insurance in the past 24 months especially? You must have been in the BK and making on-time payments for the at least 12 months with no delinquent credit after the BK. And finally, the BK court must specifically approve of the reverse mortgage. We have closed many loans for borrowers currently in BK and the court has not denied it yet because it did make sense for the borrowers, but you need to know that it would require the court involvement.
  Reply to ARLO
  - Ellen
    December 8th, 2020
    
    My husband and I have less than a year left on a chapter 13 Bankruptcy.. the past 6 months were not able to make mortgage payments, I lost my job, he has Parkinson's, and is declining, and lost his pension. I am 65, he is 67... we would like to do a reverse mortgage, feeling it's the only thing, we have left. We owe $320,000, the house is appraised at 550,000. We would like to stay here till we die, then house gets handed over to the bank, and we would pay our taxes and insurance... will this be a possibility for us?
    Reply to Ellen
    - ARLO™
      December 9th, 2020
      
      Hello Ellen,
      The answer to this is not as straight forward as you may think. There are several elements here that must be considered.
      Firstly, HUD says that borrowers with a Chapter 13 bankruptcy must have 24 months on time payment history and must get approval from the Bankruptcy court for the loan. If you met those elements, you would be ok to apply under the HUD rules.
      Secondly, you have the loan parameters for your age and property value to consider. HUD will use the age of the younger borrower to determine your reverse mortgage benefits.
      Therefore, at the younger age of 65, the maximum benefit available is 54.2% of the value of the home.
      You currently owe approximately 58.2% of the value of your home so the loan would not be large enough to pay off your existing loan, and that does not include any costs or set asides and I will explain the set aside in a moment.
      As I stated, if you had 24 months' history of all on-time payments and the court approval, your credit would be approved but without the on-time payments, you would be reliant on the underwriter approving your loan based on circumstances beyond your control and the loss of a job and medical issues may well be the basis for that distinction.
      If you could substantiate that there were no other late payments in the past two years and the only late payments that occurred happened after the loss of the job or the onset of additional medical expenses, you still might get the approval with a Life Expectancy Set Aside (LESA) for the payment of taxes and insurance.
      A LESA is where some (and in some cases all) loan proceeds are not available to the borrower and set aside so that the lender/servicer can pay the taxes and insurance as they become due.
      This works well for a lot of folks but when you are already short funds to close, this would only give you less funds available to pay off the existing mortgage.
      So, the answer is yes, it can be done, but based on the amounts owed, property value and the ages you have given me, I am sorry to say that it would most likely not work in your situation.
      There are HUD counselors available and may HUD resources on the HUD website at https://www.hud.gov/program_offices/housing/sfh/hcc/hcc_home.
      I would encourage you to seek help from a professional who may have more answers with other programs or solutions than just the one with which we work and the sooner the better.
      This is not something that gets better with age.
      Reply to ARLO

Can I get a reverse mortgage while in Chapter 13 bankruptcy?

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Can I get a reverse mortgage while in Chapter 13 bankruptcy?

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