Reverse mortgages aren't immune from foreclosures
How defaulting on a reverse mortgage works
- You never make a payment on a reverse mortgage until the loan comes due in full.
- If you do not pay off the full amount when it comes due, you go into default.
- A HECM loan can become payable if you move out, fail to pay taxes and fees, or do not maintain the property.
On a forward mortgage, borrowers make monthly mortgage payments to the lender for the life of the loan. If borrowers get too far behind in their payments, they can go into default, and the lender can eventually begin foreclosure proceedings. But with a reverse mortgage, the lender pays the borrower based on the equity in the home. So how can a reverse mortgage go into foreclosure?
Reverse mortgage borrowers can still go into default under certain circumstances. The main way this can happen is if the loan becomes due and payable and the borrower does not pay the balance owed by the payment due date.
A Home Equity Conversion Mortgage (HECM) is the most widely used reverse-mortgage program and is insured by the Federal Housing Administration (FHA). An HECM loan becomes due and payable once all borrowers on the loan have died, the property is sold or ownership is transferred, or the borrowers no longer use the home as their principal residence for any reason.
With HECM loans originated on or after Aug. 4, 2014, surviving spouses who were not co-borrowers on the reverse mortgage can get the loan repayment deferred and remain in the home as long as certain criteria are met and all obligations of the original mortgage are fulfilled.
These obligations include paying all property taxes, maintaining adequate homeowner's insurance, staying current on homeowner association dues and keeping the property in good condition. If an HECM borrower or a surviving spouse fails to meet any of these obligations, the loan can become due and payable, giving the owner or surviving spouse a limited amount of time to either fix the problems or pay off the mortgage before going into default.
If the borrowing homeowner has lived outside the home for more than 12 consecutive months (perhaps due to living in an elder-care facility), this constitutes no longer using the home as a principal residence, which also can trigger repayment. This can be an issue if the borrower wishes to return to the home eventually or if a spouse who did not co-sign the loan still resides there, because the loan may become due, forcing the borrower to pay off the loan balance.
If you have defaulted on your reverse mortgage or believe you might have an issue that could lead to default, you should immediately contact the servicer of your loan to discuss your options. This is not the FHA and may not be the mortgage company that originally set up your reverse mortgage because they may have assigned the servicing rights to another company. Check your documentation or any mail you have received about the loan or the default to find your servicer.
Some of the options available to you if you are in default on your reverse mortgage may include establishing a repayment plan that can give you up to two years to pay off the loan, refinancing the reverse mortgage, taking out a new loan to pay off the reverse mortgage, or selling your home to cover the payoff.
You can sell the home to anyone, including your heirs, and use the proceeds to pay off the reverse mortgage. With a HECM loan, you can never owe more than 95 percent of the current market value of your home, no matter how much interest has accrued on the loan. You can never go "underwater" on a HECM reverse mortgage. This may or may not be true on private reverse mortgages not insured through the FHA, so if you get a reverse mortgage through a private lender, make sure you read the contract carefully.