Most people buy only two or three homes in their lifetime and stay in that home until their Golden Years. For those owners that have stayed in their homes for many years, they have more likely than not accumulated a significant amount of equity if not paid it off completely.
All that equity in your home can become an attractive option for helping fund your retirement. Some seniors have opted to get a reverse mortgage. This lets them use the equity accumulated in their home to supplement monthly living expense, help fill short-term financial gaps or even provide extra funding for home repairs, vacations and more.
But like any other kind of mortgage, a reverse mortgage has responsibilities and risks. Not meeting the requirements of your lender can even lead to foreclosure. Reverse mortgage foreclosures are not as common as foreclosures on traditional mortgages have been in recent years.
However, reverse mortgage foreclosures can be even more devastating. These mortgages are only available to older homeowners, so when something goes wrong, a retiree already living on limited funds may face losing their home.
The good news is, through an understanding of your risks, planning and even with assistance from foreclosure counselors and others, reverse mortgage foreclosure is avoidable.
What is a Reverse Mortgage?
Reverse mortgages require that the borrowers attend and educational session before receiving the mortgage.
But if you’re helping a loved one find a way out of a potential foreclosure, or you’re looking for the risks associated with a reverse mortgage, you may have questions first on what it is. It’s also important to understand the requirements because not meeting the terms of the loan can lead to foreclosure.
Most of us are familiar with a traditional mortgage, where we borrow money to pay for the purchase of a home. Over time, you make monthly payments and the loan amount decreases. You continue to do this until the loan is paid off, you sell the home, or in extreme cases have a financial difficulty that prevents you from being able to afford your payments.
With a reverse mortgage, the amount of the loan increases over time. Depending on the type of loan taken, a reverse mortgage makes payments to the homeowner, either as a lump sum, through a line of credit, or through monthly payments.
These payments are made to the homeowner against the equity in the home. For some owners, they may seem like the ideal way to help with finances.
But there are specific guidelines for qualifying for a reverse mortgage.
- You must own your home or have significant equity in it
- It is your primary residence
- You are responsible for paying the property taxes
- You are responsible for paying the homeowner’s insurance
- At least one of the owners must be 62 years old
- You must keep the property in good repair
It is these requirements, and sometimes the misunderstanding of them, that leads many homeowners facing reverse mortgage foreclosure into problems.
What Triggers Reverse Mortgage Repayment?
As long as you are meeting the requirements of the loan, you shouldn’t be at risk of foreclosure.
The following circumstances are what can trigger the need to repay the reverse mortgage.
- All borrowers have died: In this case, it is the heirs of the estate who must reconcile the loan through either repayment and assumption of the property, signing over the deed to the lender, selling the home and using the proceeds to repay the loan or abandon the property to foreclosure.
- The property is no longer the borrower’s primary residence: Reverse mortgages allow for up to 12 months away from the home and still consider it your primary residence, to accommodate the needs of borrowers who may require time spent in an assisted living facility or hospital
- The property is sold: If the property is sold, the reverse mortgage is then due as there is no longer equity to secure the load against. This is also true if the title of the property is transferred to someone other than the original borrowers, even without a sale
- The borrower fails to meet the obligations of the mortgage: This is the circumstance most likely cause a foreclosure to occur on a reverse mortgage
The requirements of your reverse mortgage are specific to your lender. But generally speaking, you’re going to be in default, and have your mortgage become immediately due if you don’t pay your home owner’s insurance or property taxes, or if you fail to maintain the property properly.
This can be a bigger problem than it seems at first. Significant medical problems, expensive medications as you age and other financial drains can make it difficult for some seniors to make ends meet. Unexpected needs can make it difficult to pay these regular expenses.
How to Prevent a Reverse Mortgage Foreclosure
If you have a reverse mortgage and find yourself in a situation where you can’t meet the requirements of your loan, you have a few options to help you avoid foreclosure.
If you can no longer live in the home full-time due to health reasons, you can sell the home or transfer the title to a relative. In either case, the loan will become due immediately. But selling will prevent a foreclosure, and transferring the deed may allow your beneficiary to take a loan against the home to repay the reverse mortgage when transferred.
If all borrowers have died, the executor can sell the home to cover the loan. As long at the home is sold for at least 95% of the value, and it is an FHA-insured reverse mortgage, the lender must accept the sale to cover the loan. This prevents the executors of the estate from facing foreclosure on the property.
If you are facing foreclosure because you can’t pay your property taxes, there are a number of services that can assist you. You can try contacting your local tax assessor to see if there are programs available for seniors in your area. Many townships and counties have resources specific to seniors to help with property tax obligations.
If the problem is with paying for insurance, or with maintaining the home, there are services like the Area Agencies on Aging that may be able to assist with single-purpose loans that are inexpensive. Another loan may seem daunting but may be a better option than losing your home to foreclosure.
There may be other options to prevent a foreclosure as well.
A counselor that specializes in preventing foreclosure can help you identify what needs to be done, and what resources you can use, to help you keep your home.
With the right help, it’s possible to avoid foreclosure on your reverse mortgage, whether you are the original borrower or handling the estate after the fact. In either case, there are options available that will prevent you from losing the equity built up in the property over years of hard work.