The rising cost of living and shrinking pensions have left many seniors in a precarious position, even delaying retirement by several years, and those who have a lot of equity in their homes are at risk of ending up in the most precarious situation of all, especially if they still have a mortgage. Government loan modification programs meant to help people bounce back from the recession calculate whether or not you’re eligible based largely on the value of your home, and the more equity you have, the less likely you are to qualify.
What Is a Reverse Mortgage?
Seniors who don’t qualify for loan modification programs can choose to take out a reverse mortgage instead. A reverse mortgage is a loan taken straight from the equity on your home, to be paid out of net proceeds when the home is actually sold. These highly specialized financial tools allow you to go without making mortgage payments, allowing you to live more comfortably and save more for the moment when you can actually retire.
Most reverse mortgages are Home Equity Conversion Mortgages (HECMs) and are insured by the federal government. They are available to seniors over 62 with equity in their homes, and the amount you can borrow is based on several factors including your exact age, how long you’re expected to stay in the home, and how much your home is actually worth. Many lenders require you to keep some equity in the home and will not make reverse mortgages of less than $10,000. Reverse mortgages also have a cap set by the government of $625,000.back to menu ↑
When the Loan Matures
Reverse mortgages are not considered due and payable until they mature, so the home is not under any threat of foreclosure until the loan matures. This can be caused by the following events:
- All the borrowers die
- The borrower(s) move out of the home. Most reverse mortgages give borrowers a 12 month grace period if they are moved into some kind of long term health care; if borrowers can return to the home within twelve months the loan continues on as before
- The home is sold and the money received is not actually used to pay off the reverse mortgage. This may affect any new residents who have moved into the home
- The loan goes into default because the borrower(s) has failed to pay their insurance or taxes
- The borrower(s) no longer uses the home as a primary residence
- The borrower(s) allow the home to fall into disrepair enough to dramatically impact the value of the home
Preventing Reverse Mortgage Foreclosure
At this time the bank has full rights to foreclose on the home if it is not immediately sold and the loan repaid. This means that unless your heirs can afford to buy the home for at least 95% of the value, they will not be able to inherit. However, there is a way around this, as long as you’re still working.
You see, a HECM doesn’t have to be paid until the home is being sold but that doesn’t mean you can’t start paying it off now. If you continue making your regular mortgage payments or something close to that amount you can chip away at the debt dramatically, maybe even get rid of it altogether. This means your children will pay a small amount for the home if they have to pay anything.
It is also possible for you to help one of your kids who is struggling with their mortgage bills by moving into their home and taking out a reverse mortgage on it. They will often be allowed to sign the mortgage with you, protecting them from having to sell the house if you pass away. You can also work together to pay off the reverse mortgage at your own speed rather than having to pay pre-set mortgage payments each month.
Thus, the steps to avoid reverse mortgage foreclosure are:
- Correct the default
- Pay off any related debt
- Sell the home for at least 95% of the appraised value at the time the reverse mortgage was taken out. Net proceeds from this sale must be used to pay off the reverse mortgage before being used for anything else
- Deed the property directly to the lender so they can sell it to recover their money.
No Deficiency Judgements
Sometimes the total value of the home will turn out to be less than the total cost of the reverse mortgage. Some states allow lenders to get a personal judgment against the borrower or their estate to recover this deficiency. These No Deficiency Judgements can only be applied to reverse mortgages.back to menu ↑
The Bottom Line
Homes with reverse mortgages can be foreclosed, but only in the very specific circumstances outlined above. Most homeowners with reverse mortgages have nothing to worry about.