What’s a reverse mortgage foreclosure?
Learn what a reverse mortgage foreclosure is, situations that can trigger foreclosure, and how to avoid foreclosure on your home.
When you take a reverse mortgage, your home serves as the collateral for the loan. While you won't be required to make monthly mortgage payments, the lender expects you to continue paying certain costs to maintain your home. However, if you default on these obligations, it could trigger foreclosure proceedings.
A reverse mortgage foreclosure occurs when you sell or transfer the title to another person, fail to occupy the home for 12 consecutive months or fall behind on financial obligations related to the home such as property taxes and homeowner insurance. Once the loan becomes due and payable, you will receive a demand letter from the lender outlining the deadlines you must adhere to. You will be required to make payments within six months, or the lender will pursue foreclosure to satisfy the loan.
What is reverse mortgage foreclosure?
When you borrow a reverse mortgage, the loan is based on the equity you have built in your primary residence. Instead of making monthly mortgage payments to the lender, you will receive a lump sum payment, monthly payments, a line of credit, or a combination of these options.
You will be required to meet certain requirements to comply with the reverse mortgage agreement. If you violate the requirements outlined in the agreement, or another qualifying event occurs, the lender can begin foreclosure proceedings to recover its losses.
For example, if you move to a nursing home for an extended period or fail to pay property taxes, the reverse mortgage will become due, and you or your heirs will be allowed 30 days to respond to the lender's request for the mortgage payment. Once this period lapses, the lender can initiate the foreclosure process on the primary residence.
When you might face foreclosure
If you have received a letter from the reverse mortgage lender requesting the loan balance to be paid, and the loan is not yet due, it means the lender has initiated the foreclosure process. The reverse mortgage agreement outlines the circumstances that can give rise to foreclosure.
The following are instances when a foreclosure can occur:
Borrower moves out
If the borrower moves out of the property for up to 12 consecutive months due to a mental or physical illness, the reverse mortgage will become due and payable. Also, if you move out, and rent out the property, the lender will require payments immediately.
The borrower transfers ownership or sells the property
When you sell the home or transfer its ownership to another person, the reverse mortgage becomes due immediately. The lender uses the proceeds from the sale to pay off the reverse mortgage debt and other liens attached to the property.
If a borrower dies, and the surviving spouse does not use the home as a primary residence, the lender will call the reverse mortgage loan due. A non-borrowing spouse may be allowed to use the home as a primary residence if they meet certain requirements.
The borrower does not meet the contractual requirements of the loan
Although you won’t be required to make monthly mortgage payments, you must stay current on all costs associated with owning the home, including property taxes, homeowner insurance, and regular home maintenance. If you don’t meet these contractual requirements, the lender can call the loan due, and it will become payable immediately.
Reverse mortgage foreclosure timelines
If one of the qualifying events occurs, the lender will initiate the foreclosure process. While you won't be evicted from your primary residence immediately, knowing the reverse mortgage foreclosure timelines can help you know what to do at each point.
Here are the important timelines of a foreclosure process:
Once you have defaulted on the reverse mortgage, the loan will be considered due and payable. You will receive a demand letter within 30 days of the loan becoming due, and the letter outlines the deadlines that you must meet to notify the lender of how you will address the situation.
The borrowers must respond to the lender’s demand letter within 30 days. If the borrower or heirs offer to pay the loan, the repayment process lasts 6 months. You can request 90-day extensions up to two times, subject to approval by the US Department of Housing and Urban Development (HUD).
If the debt is not paid within 6 months since the loan became due and payable, or the two 90-day extensions have expired, the lender will take the first action to begin the foreclosure process. The foreclosure timelines vary across states, and the lender must take possession of the home within HUD-prescribed timelines for each state.
How to avoid reverse mortgage foreclosure
If you are facing foreclosure, you can avoid foreclosure by taking certain actions. Here are ways to avoid foreclosure:
Get current on homeownership costs
If the reason for default is non-payment of property taxes or homeowner insurance, you should pay these costs immediately to avoid foreclosure. If you cannot afford these costs, check if you qualify for a repayment plan with your lender. However, the repayment plan may not cover all homeownership costs.
Prove your home is your primary residence
Once you take a reverse mortgage, you are required to prove that you are using your home as the primary residence each year. If you did not return the annual certification to your lender, or the lender did not send you the annual certification, you should call your lender to remedy the situation.
Pay off the loan
If you have money in a savings account, you can use the funds to pay off the reverse mortgage balance and keep your home. You can pay 95% of the property value, even if the mortgage balance is more than 95% of your property value.
Sell the home
You can sell your home and use the sale proceeds to pay the reverse mortgage balance. The lender can accept the lesser of your outstanding loan balance or 95% of the current market value of the property. If the sale proceeds exceed the loan balance, you can keep the excess. Also, if you sell for less than you owe, you won't be required to pay the remainder; the mortgage insurance will cover the remainder.
Sign a deed in lieu of foreclosure
If you are unable to sell your home, you can sign a deed in lieu of foreclosure to cancel the debt, and surrender the home to the lender. Before you can surrender your home, you must be current on all costs and ensure the property is in good condition. You must also vacate the home and remove your belongings.