A reverse mortgage can provide an affordable way for older homeowners to remain in their homes without having to make monthly mortgage payments. If they have enough equity in their home and they qualify in other ways, they may receive funds from the reverse mortgage loan servicer that can be used to pay for living expenses, medical bills, and other costs.
However, even though the homeowner need not make monthly payments, their reverse mortgage can enter foreclosure proceedings if they do not adhere to specific requirements in the loan terms. If that happens, they may consider signing a deed in lieu of foreclosure to stop the foreclosure proceedings.
Before signing the deed, though, it’s important to know the pros and cons of taking this step to stop foreclosure proceedings.
- A deed in lieu of foreclosure can stop all foreclosure proceedings.
- A deed in lieu of foreclosure will impact your credit history for four years.
- It is possible that the reverse mortgage lender will not accept your deed in lieu of foreclosure.
How Does a Reverse Mortgage Work?
Available to homeowners age 62 or older, a reverse mortgage is a way for homeowners to borrow money and guarantee the loan with their home. The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA) and subject to FHA limits. Borrowers receive a loan amount based on how much home equity they have, and they can use those proceeds however they wish, including to pay off any current mortgage.
While borrowers don’t have to make monthly payments on the loan, they must adhere to the following requirements to avoid defaulting on the reverse mortgage and triggering foreclosure proceedings:
- Pay all property taxes, homeowners insurance, and related fees (such as those for homeowners or condominium associations) on time.
- Keep the home in good living condition.
- Use the home as the borrower’s primary residence (living there for most of the year).
How Does a Deed in Lieu of Foreclosure Stop Foreclosure Proceedings?
If the borrower fails to comply with the requirements listed above, the reverse mortgage servicer can start foreclosure proceedings. They must notify the borrower that the loan is in default and is now payable and due. Upon receipt of this notification, the borrower can stop foreclosure proceedings by complying with the unmet requirement, such as paying overdue taxes or certifying that the home is their primary residence.
However, if they are unable to comply with the requirements to stop foreclosure, then borrowers have the option to willingly sign a deed in lieu of foreclosure to resolve the matter.
With a deed in lieu of foreclosure, the borrower signs over ownership of the home to the lender to stop foreclosure.
Pros and Cons of Using a Deed in Lieu of Foreclosure to Stop Foreclosure Proceedings
If a borrower chooses to sign a deed in lieu of foreclosure, the benefits include:
- All foreclosure proceedings are stopped.
- The borrower is free of any further obligations or recourse on the reverse mortgage.
- If the borrower is responsible for any deficiency (the difference between the value of the home and the mortgage balance), your lender may waive it.
- The matter can be resolved without lengthy delays or going to court.
- A deed in lieu of foreclosure has less of an impact on the borrower’s credit history (four years) than a foreclosure would (seven years).
- You could receive relocation expenses, known as “cash for keys,” from private programs.
The downsides of signing a deed in lieu of foreclosure include:
- The borrower will lose the home and have to relocate.
- The borrower will lose any remaining equity in the home.
- If the lender does waive the deficiency and that amount is more than $600, the Internal Revenue Service (IRS) will consider it income, and the borrower will have to pay taxes on it.
- Though not as bad as a foreclosure, signing a deed in lieu of foreclosure will impact the borrower’s credit history.
- The lender has the right to reject a deed in lieu of foreclosure.
All foreclosure proceedings are stopped.
The borrower is free of any further obligations or recourse on the reverse mortgage.
A lender may waive any deficiency (between the value of the home and the mortgage balance) that the borrower is responsible for.
The matter can be resolved without lengthy delays or going to court.
There is less impact on the borrower’s credit history than a foreclosure has.
You could receive relocation expenses, known as “cash for keys,” from private programs.
The borrower will lose the home and have to relocate.
The borrower will lose any remaining equity in the home.
The IRS will consider any waived deficiency of more than $600 as income that the borrower will have to pay taxes on.
It will impact the borrower’s credit history for four years.
The lender has the right to reject a deed in lieu of foreclosure.
What Are the Alternatives to a Deed in Lieu of Foreclosure?
Although there are pros and cons to using a deed in lieu of foreclosure to stop foreclosure proceedings, it may not be the best choice. Here are some other options to consider:
- Refinance the reverse mortgage—If you have enough home equity, you may be able to refinance the existing reverse mortgage for a new one that pays off the current reverse mortgage.
- Enter a repayment plan—If you don’t have the money to pay any overdue taxes or other expenses to comply with the reverse mortgage requirements, you may be able to enter a repayment plan to pay back the loan service that pays those expenses for you. This amount could be spread out over a term of up to five years.
- Pay off the home—If you’re able to secure funding from other assets or from an heir, you can pay off the reverse mortgage.
- Sell the home—Selling the home yourself means that you would be able to keep any excess proceeds once the reverse mortgage is paid off.
Will a deed in lieu of foreclosure stop foreclosure proceedings?
Yes, a deed in lieu of foreclosure means that you are willingly turning the home over to the lender to satisfy the reverse mortgage loan balance.
Will a deed in lieu of foreclosure impact my credit history?
Yes, it will remain on your credit report for four years. But a foreclosure remains on your credit report for even longer: seven years.
Can you sell your home instead of foreclosing on it?
This is one of the options that you can consider instead of choosing a deed in lieu of foreclosure. An advantage is that you would be able to keep any excess proceeds once the reverse mortgage is paid off, which might help you pay for another home.
The Bottom Line
Facing foreclosure proceedings on your reverse mortgage can be difficult and scary. Using a deed in lieu of foreclosure could stop the foreclosure, freeing you from all financial obligations with the reverse mortgage, but also could leave you without a home. It’s important to review all your options to stop a foreclosure on your reverse mortgage before signing a deed in lieu of foreclosure.