Having a reverse mortgage can sound like a dream come true. Instead of making monthly payments to your mortgage lender, your mortgage lender sends you money, which you can use for whatever expenses you wish. To repay the mortgage, your heirs can simply sell the home after your death.
However, there are circumstances in which a lender may foreclose on a reverse mortgage. It’s important to know what these circumstances are so that you can avoid them.
- Communicating with your loan servicer is crucial to stopping a foreclosure on a reverse mortgage.
- Paying past-due property taxes, insurance premiums, or other costs could stop foreclosure on a reverse mortgage.
- Selling the home also could stop a foreclosure on a reverse mortgage.
How Does a Reverse Mortgage Work?
Although some private lenders offer their own version of a reverse mortgage, the most common type of reverse mortgage is a home equity conversion mortgage (HECM). This type of reverse mortgage is backed by the Federal Housing Administration (FHA). The amount that may be borrowed is based on the appraised value of the home (and is subject to FHA limits). With an HECM, you can borrow money from a lender with your home as the guarantee on the loan. You can use the proceeds to pay off your existing mortgage or to cover living expenses, medical bills, travel, or other costs.
An HECM is only for homeowners who are age 62 or older. The loan with a reverse mortgage is repaid when you no longer live in the home. If you sell the home and move, move into a nursing home or assisted living facility, or die, then the home is sold to pay the reverse mortgage. Or your heirs can pay off the loan and keep the home.
What Could Prompt a Foreclosure on a Reverse Mortgage?
Although you don’t have to make payments on an HECM, certain requirements must be met to avoid foreclosure. They are:
- You must pay your homeowners insurance and property taxes—along with any related fees such as homeowners or condominium association fees—on time.
- You must make sure that your home remains in good condition.
- You must use your home as your primary residence, meaning that you will not live elsewhere for significant periods of time (more than two months in a calendar year).
Failure to comply with these requirements could result in your default on the loan and prompt your lender to start foreclosure proceedings.
How Does the Foreclosure Process Work on a Reverse Mortgage?
If you receive notice that your reverse mortgage is in foreclosure proceedings, take a breath. You will not be evicted from your home right away. That being said, you do need to pay attention to the time line of a reverse mortgage foreclosure so you can address the situation, and, one hopes, avoid losing your home.
Here is the basic process of foreclosure proceedings for a reverse mortgage:
- Once you have defaulted, the loan will be considered due and payable within approximately 30 days. This occurs when the loan servicer notifies the U.S. Department of Housing and Urban Development (HUD) of the reason for default.
- The loan servicer must notify you within 30 days of the loan being due and payable. You should receive a demand letter documenting deadlines that the borrower must meet to notify the servicer how they plan to resolve the loan.
- Once the demand letter has been sent, an appraisal of the property may be ordered within 30 days.
- The loan servicer must take the first legal action to start foreclosure proceedings within six months of the date when the loan is considered due and payable.
- The foreclosure process must be completed and the servicer must take possession of the home within the HUD-prescribed time line for each state.
How Can You Avoid Foreclosure on a Reverse Mortgage?
There are steps that you can take to avoid foreclosure depending on the reason why the loan is in default. Here is what you can do to remedy each possible reason for default.
You have unpaid taxes, insurance, or other fees
If you haven’t paid your taxes or insurance, pay those right away. If you don’t have the funds to make those payments, you may qualify for a HUD-approved repayment plan with your servicer. However, this plan will not cover homeowners or condominium association fees or other similar costs.
If you do not qualify for a repayment plan, talk with an attorney or reverse mortgage housing counseling agency for advice. You also can check with your local Area Agencies on Aging (AAA) for possible assistance.
Your home is in disrepair
If your home is in disrepair, find out exactly which repairs must be completed to comply to stop foreclosure. If you can pay for the repairs, consult with various contractors for estimates and choose one that you trust. Make sure that you have a signed contract of work outlining the agreed-upon terms before any work starts. If you are unable to pay for repairs, talk with your local AAA office to see if there is assistance available to help you cover the costs.
To prove that your home is your primary residence, you are required to certify this each year and confirm that your contact information is up to date. If you did not receive the annual certification sent by your lender or you did not return it, call your lender right away to find out how you can remedy the situation for compliance.
Other Options to Stop a Foreclosure on a Reverse Mortgage
If you are unable to come up with the money needed to bring taxes or insurance up to date or perform needed repairs, there are other options to stop a foreclosure on a reverse mortgage.
- Get a new mortgage—If you qualify, you can get a new mortgage to pay off the loan balance on the reverse mortgage. Of course, with this option, you will have to go back to making monthly payments on the loan.
- Sell the home—You may need to sell the property to pay off the reverse mortgage. The loan servicer can accept the lesser of the amount that you owe on the reverse mortgage or 95% of the current market value of your home. If the home is sold for more than you owe, you can retain the excess proceeds.
- Sign a deed in lieu of foreclosure—Signing a deed in lieu of foreclosure cancels the debt and returns the property to the servicer. Certain requirements must be met, including leaving the home in good and marketable condition, removing all personal belongings, and having a clean title.
Can a reverse mortgage enter foreclosure proceedings?
Yes. If the borrower does not comply with the loan requirements, such as paying property taxes on time, then a reverse mortgage could enter foreclosure.
Will I be removed from my home if it enters foreclosure proceedings?
Not immediately. There are time lines for foreclosure proceedings on a reverse mortgage that could take several weeks to months to complete.
If I am in default, can I sell my home to pay off a reverse mortgage?
Yes, that is one option if you are unable to otherwise address the reason why the loan is in default. If your home is sold for more than you owe, you can retain the excess proceeds and use them to find another home.
The Bottom Line
Facing foreclosure on a reverse mortgage is not a welcome prospect. However, there are steps that you can take to stop a foreclosure on a reverse mortgage. The most important step is contacting your loan servicer as soon as you receive notice of foreclosure proceedings. In fact, staying in constant communication is crucial to avoiding foreclosure. Loan servicers are willing to work with borrowers to avoid foreclosure provided that the borrower is willing to take the necessary action to bring the loan into compliance.