When you take out a reverse mortgage, you normally aren’t obligated to repay the loan during your lifetime. Instead, that responsibility usually falls on your heirs, who can use your home’s value to make up the difference. If the mortgage balance exceeds the value of your home when you pass away, your heirs are not responsible for the excess, and this usually gets resolved by selling the home.
However, some lenders require borrowers to pay home equity conversion mortgages while they are still alive. There are a few ways to avoid this scenario, but it’s important to know how they happen and their potential impact.
Submit an online application form to inquire about Angel Oak Mortgage Solutions financing options.
Buy a home or refinance your existing mortgage with Zero Mortgage.
Older homeowners can get peace of mind and added financial security with a reverse mortgage from AAG.
What is a Reverse Mortgage Foreclosure?
Reverse mortgage foreclosures are when the mortgage lender requests the borrower to repay the loan in full. The lender provides a notice giving the borrower 30 days after the triggering event to repay the loan. Not every buyer can fulfill this obligation. Some request extensions, while others end up with a foreclosure. A reverse mortgage can only take place if a triggering event takes place. This usually happens after the last homeowner passes away, as a reverse mortgage borrower would expect, but it can happen while the borrower is still alive.
What is a Maturity/Triggering Event
Maturity events and triggering events are the same names for an event that prompts foreclosure to take place. Most triggering events occur when the homeowner passes away, but if a homeowner violates the conditions for the reverse mortgage, it can result in a triggering event.
Common Causes of Reverse Mortgage Foreclosures
Reverse mortgage foreclosures can happen for a few reasons. Here are the common reasons they occur:
- The homeowner passes away
- The homeowner does not adequately maintain the property
- The homeowner doesn’t pay property taxes, homeowners insurance, or HOA fees
- The homeowner sells the property or transfers it to heirs
- The homeowner no longer establishes the property as their primary residence
Actions You Can Take During a Reverse Mortgage Foreclosure
If the homeowners pass away, there isn’t too much you can do. The home equity conversion mortgage becomes due. Heirs can pay off the loan with cash or sell the home. But what about the other scenarios? Here are a few steps you can take to protect your home:
- Sell your home: Sometimes, the best way to navigate a foreclosure is to sell your home. Not everyone wants to pursue this option. The other solutions can help you avoid this choice.
- Convert it into a regular mortgage: You might be able to turn your home equity conversion mortgage into a traditional mortgage, depending on your financials and the lender’s requirements.
- Get expert advice: A HUD counselor can share strategies and help you through the process. You might avoid foreclosure with their advice.
- Ask for a repayment plan: Some borrowers qualify for this option. You will have to check with your lender.
- Give the deed back to the lender: A deed-in-lieu of foreclosure can help you keep your home. Your heirs will be responsible for the debt.
Regardless of which choice you pursue, it’s a good idea to communicate with your lender throughout the process. Lenders appreciate effective communication. They may be more willing to work out a deal if you keep in touch.
Submit an online application form to inquire about Angel Oak Mortgage Solutions financing options.
Buy a home or refinance your existing mortgage with Zero Mortgage.
Older homeowners can get peace of mind and added financial security with a reverse mortgage from AAG.
Reverse Mortgage Foreclosures Timeline
All reverse mortgage foreclosures start with a triggering event, and your lender will send you a notice within 30 days. The lender can send a pre-foreclosure notice if the homeowner does not repay the debt or negotiate a debt repayment plan. The homeowner can request two 3-month extensions approved by the HUD if they can demonstrate an effort to sell or refinance. If you do not ask for extensions, the lender can proceed with the foreclosure right away. The lender can also advance to the foreclosing stage if negotiations fall flat during the two extensions.
While that’s the basic outline, each state has different laws. Understanding local nuances can help you determine if your home is vulnerable to foreclosure sooner or later than the typical timeline.
What Happens After a Reverse Mortgage Foreclosure?
After a reverse mortgage foreclosure, you and your heirs are no longer responsible for the loan balance. Instead, the Federal Housing Administration (FHA) will cover any losses the lender incurs if the remaining loan balance exceeds the value of the home. The lender then sells the home at an auction market to the highest bidder. This winning bidder then becomes the new owner of the home.
Can You Avoid a Reverse Mortgage Foreclosure?
It’s possible. Any homeowner who wants to avoid foreclosure must communicate with their lender. Talking with your lender can help you settle your differences and establish common ground. In addition, you may have to negotiate a new repayment plan or come up with funds to cover the loan’s balance.
It’s also important to consider the triggering event. Did you miss last year’s property taxes? Did you forget to pay the homeowner’s insurance premium? Is your property in bad condition? The triggering event tips you off on the solution the lender seeks. It’s possible for a homeowner to repair a poorly maintained property to avoid foreclosure. On the other hand, the lender may be satisfied with the progress and let everything return to the status quo. Being courteous and professional during email and phone exchanges can make the lender more eager to work with you and discover a resolution.
What Are Your Rights as a Reverse Mortgage Borrower?
Reverse mortgage borrowers can seek guidance from a HUD-approved counselor to assess their options. You can reach out to counselors before getting the loan and during the loan’s term. You do not have to repay the reverse mortgage at all as long as you follow the rules. The bank will collect the payment after the homeowner passes away.
If you are an heir, you can provide legal documentation (i.e., a death certificate) to authorize the transfer. The heir can pay off the loan or sell the home. Heirs do not have to pay more for the home than its value. For example, if the home has a $500,000 loan balance and a $400,000 value, the heir does not have to pay $500,000 to give it to the bank. If heirs decide to buy the home, they will have to pay the loan’s balance or 95% of its appraised value, depending on which is less. Banks approach heirs with repayment plans before foreclosing on the home.
Foreclosure Protections for Reverse Mortgage Borrowers
Worried about paying off the debt? Reverse mortgage borrowers who keep up with the rules won’t have to repay that debt. It’s one of the perks of reverse mortgage loans.
In the event a mortgage lender tries to foreclose on your home, you can use two 3-month extensions if you can demonstrate progress with negotiating a repayment plan or paying off the loan. Some surviving spouses not included in the title of the home can qualify as nonborrowing spouses. This role allows you to keep the home, but you need to uphold the following conditions:
- Be legally married to the deceased homeowner
- Adhere to the reverse mortgage’s conditions
- Demonstrate your legal right to hold the home title within 90 days of your spouse passing
- Stay up to date on property taxes, homeowners insurance, and property maintenance
- Demonstrate the home was your primary residence when the reverse mortgage was in use
Should You Get a Reverse Mortgage?
A reverse mortgage can be a good idea. This financial product pays you each month by using your home’s equity. Since home values tend to go up, you will have more equity to tap into. Reverse mortgages are especially useful for homeowners approaching retirement who want an extra source of funds. Ultimately, it all comes down to weighing out its pros and cons. If you need help in deciding, it’s better to get in touch with a mortgage lender who offers reverse mortgages or a home equity specialist to learn more.
