A reverse mortgage foreclosure can happen to you. It is a loan and has requirements. While you don’t send in a check every month, you use the equity as collateral for the checks that they send you. That means that you must maintain the property, both physically and financially, or you will default.
- You can lose your house because of a foreclosure on a reverse mortgage.
- HUD made provisions not foreclose on HECM loans during the COVID-19 lockdown.
- There is a process that lenders must follow when you fall behind on your loan before they may foreclose.
If you consider one, then make sure you understand all the terms of the agreement. Specifically, consider what happens if you fall ill or die. Also, consider the provisions of your loan for maintenance. These can cause you to default later.
Can a Reverse Mortgage Go into Foreclosure?
A reverse mortgage can go into foreclosure for a variety of reasons. Your balance becomes due and your property subject to foreclosure when you:
- Permanently move out
- Temporarily move out for more than 12 months due to illness
- Die and no other borrower lives in the house as a principal residence
- Don’t meet the contractual requirements of the loan
In these cases, the loans become due and payable. In some cases, like moving to a new home or settling an estate, you simply sell the property, and the bank takes the money from the proceeds of the sale. Your lender can call your balance due if you fall behind on your taxes or insurance premiums. Also, if you can’t maintain your property and it falls into disrepair the bank can foreclose.1
Can You Lose Your House?
You can lose your house with a reverse mortgage. Any of the above may trigger a clause in your contract making the balance due. If you can’t pay the lump sum, then the bank will foreclose. The most common reason banks foreclose on these loans is when the borrower fails to:
- Give the lender proof of occupancy
- Pay property taxes or insurance premiums
- Maintain the property
If the lender calls the loan due, the borrower must pay the balance or 95% of the house’s fair market value, whichever is less. They can also deed the property to the bank or sell the property. Otherwise, the lender will foreclose.
What Happens When You Default?
Foreclosure is the main concern for most people when they go into default. However, there are other consequences that happen before that happens.
- Your bank reports the default to credit monitoring agencies affecting your scores.
- Your lender stops sending you monthly checks.
- The default puts a cloud on your title.
The most immediate effect is losing your monthly checks, but if you don’t get it settled quickly it also impacts your ability to borrow money. Finally, if it goes far enough you could lose your house to foreclosure.2
HECM Foreclosures and COVID-19 (Coronavirus)
On March 18, HUD announced it will stop initiating and completing foreclosures for 60 days. This includes FHA-insured reverse mortgages. For more information about this announcement please go here.
Reverse Mortgage Foreclosure Process
The reverse mortgage foreclosure process begins when the borrower defaults in one of the ways listed above. After this, it generally follows a similar pattern.
- Your loan servicer sends out a due and payable letter with the current balance. It includes options for repaying the loan, a response timeline, options to avoid foreclosure.
- Lenders generally give the owner or estate six months to pay the balance.
- Owners can apply for up to two 90-day extensions if the property is actively marketed.
- If the owner doesn’t sell or refinance the mortgage and doesn’t respond within 30 days, then the lender will start the foreclosure process.
If the owner or heirs sell the property then the balance is due immediately, and they must arrange to pay off the loan. Interest continues to accrue until the balance is paid in full.3
HUD Reverse Mortgage Foreclosure Guidelines
The department of Housing and Urban Development (HUD) has additional guidelines that Home Equity Conversion Mortgages (HECM) lenders must follow. These provisions include:
- Notify HUD that the loan is due. Often, they must get approval to continue.
- Notify the borrower, any eligible non-borrowing spouse, or estate that the balance is due.
- Give the borrower 30 days to fix the problem that caused them to default and reinstate the mortgage.
- Provide time to pay the balance, sell the house, or provide a deed in lieu of foreclosure.
- Provide notice of charge delinquency and determine if a loss mitigation option is possible.
HUD makes provisions for charge delinquencies, which include taxes, insurance premiums, association dues, and other special assessments. Lenders use repayment plans, foreclosure delays for at-risk borrowers, delay due and payable status if the balance is less than $2,000.
Borrowers 80 and over may qualify for an at-risk extension. They must have a terminal illness, long-term disability, or a unique need to qualify. HUD approves the extension and renews the certification annually.
Under certain conditions, the due and payable clause may be deferred for the surviving, non-borrowing spouse. The spouse must qualify for a Mortgage Optional Election.4
Final Thoughts on Reverse Mortgage Foreclosure
For many seniors who have limited income and want to stay in their homes, this option seems like a good idea. Many companies push these mortgages and the sales pitches can be very convincing. Some even tell you that you won’t lose your home.
You can lose your home for a variety of reasons when you get one of these loans. Your house is collateral for the money you borrow, and banks will seize your property if you don’t meet the terms of the contract. If you don’t want to risk your home, there are other options, such as a home equity loan or downsizing. While there is often no perfect solution, you should consider all your options before you make your best decision.
If you are already delinquent, you should contact your loan servicer and find out what your options for staying the process. You may need to hire an attorney who is experienced with foreclosures.