Can a Reverse Mortgage Result in Foreclosure? A common fear that prevents some people from even looking into a reverse mortgage is the persistent belief that all reverse mortgages result in the borrower unwillingly losing their home to foreclosure. The truth is more nuanced. Yes, a reverse mortgage can end in foreclosure. However, the situations that lead to a reverse mortgage foreclosure are typically much different than traditional mortgage foreclosures. It’s also worth noting that a foreclosure is only one of several possible avenues for repaying the loan when it comes due. Sometimes it is the best course of action, but that does not mean that there aren’t other options available to borrowers and their heirs in most cases. The following is an explanation of how foreclosure works with a reverse mortgage and when it commonly occurs. What Causes Most Reverse Mortgage Foreclosures? When the loan matures, the loan balance sometimes exceeds any reasonable potential sale price of the home. In such cases, borrowers have no economic incentive to sell the home on their own. Fortunately for the borrower and their beneficiaries, all reverse mortgages are “non-recourse” loans. This offers them the opportunity to walk away despite a loan deficiency. And this should not impact their credit profile. Foreclosure is the mechanism that conveys title to HUD (or the lender), so they can sell the home and ultimately pay off at least a portion of the loan balance. Reverse Mortgages Foreclosure Due to a Maturity Event However, though reverse mortgages don’t require a monthly principal and interest mortgage payment during the life of the loan, there are other borrower obligations contained in the reverse mortgage loan agreement. The borrower has agreed to occupy and maintain the home as well as pay all property-related charges. Failure to do these things will cause the loan to mature. A “maturity event” is a term used to describe the life stage of the loan when:
When one of these situations occurs, the borrower or one of their beneficiaries will often notify the lender of their intentions to sell the home. The lender will typically allow them six months to sell the home, and the Department of Housing and Urban Development (HUD) generally approves two- to three-month extensions for up to one year. If no action is taken to sell the home, the lender will need to foreclose on the home and handle the sale themselves so that the loan can be repaid. Foreclosure Due to Failure to Pay Property Taxes In 2013 and 2015, HUD implemented two requirements that have significantly reduced the number of foreclosures caused by property tax defaults and other maturity events that resulted from borrower’s inability to financially uphold the terms of their reverse mortgages.
Foreclosure Due to the Condition of the Home The property must be well-kept, and good conditions must be maintained. This is important because the house is the collateral that will be used to pay back the loan after you leave the home; therefore it must be maintained in order to retain its value. Your lender or service may inspect your home’s condition by giving notice and specifying the purpose of the inspection. They also may tell you to make repairs. Generally, you have 60 days to start repairs from the day your lender or service told you to do so. It’s important to note that, while reverse mortgage foreclosures occur, they happen under a different set of circumstances than with a traditional mortgage. If you’re considering a reverse mortgage, these concepts will be covered in more depth during a mandatory reverse mortgage counseling session.
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