Can a home with a reverse mortgage be foreclosed? The short answer is “yes.” Generally speaking, a reverse mortgage foreclosure is not that big of a problem as a traditional mortgage foreclosure. While traditional mortgage foreclosure typically occur when the borrower defaults on his monthly mortgage payments, a reverse mortgage foreclosure is triggered by a variety of events:
- when the borrower dies;
- when the borrower sells the mortgaged property;
- when the borrower stops using the mortgaged property as his principal residence; and
- when the borrower defaults on the ongoing conditions of the reverse mortgage.
What happens when the borrower dies?
When the borrower dies, the lender will present his heirs with several options on how to deal with the reverse mortgage. In particular, the borrowers may choose to:
- Repay the loan and keep the property. With a Home Equity Conversion Mortgage (HECM), the most popular type of reverse mortgage, the heirs may pay either the mortgage balance or 95% of the current appraised value of the mortgaged property, whichever is less.
- Sell the property and use the proceeds of the sale to settle the loan. If there are any excess proceeds, such excess will naturally go the heirs.
- Allow the reverse mortgage foreclosure. If the heirs refuse the first two choices or fail to take any action, then the lender will initiate the reverse mortgage foreclosure proceedings and sell the mortgaged property at public auction. If the proceeds of the auction exceed the balance of the loan, such excess will go to the heirs of borrower. On the other hand, if the proceeds of the auction are less than the balance of the loan, then the lender may recover the deficiency from the Federal Housing Administration (FHA) through the HECM insurance program.
Should the borrower be survived by co-borrower, the co-borrower may choose to continue the reverse mortgage, provided that he also continues to comply with its ongoing requirements.
Finally, should the borrower be survived by his spouse, who is not a party to the reverse mortgage contract, the spouse may also continue the reverse mortgage, provided that she complies with certain requirements. The exact requirements will depend on when the reverse mortgage was taken out. However, generally speaking, the spouse must show that she has legal title to the property; that she was named as an eligible non-borrowing spouse in the reverse mortgage contract; that she and the borrower were married at the time the reverse mortgage contract was executed; that she and the borrower remained married until the time of his death; that she has resided in the property ever since the reverse mortgage contract was executed; and that she continues to comply with the ongoing requirements of the reverse mortgage.
What happens when the borrower sells the mortgaged property?
Similar to the above discussion regarding the choices of his heirs, if the borrower himself sells the mortgaged property, he will need to use the proceeds of the sale to first pay off the balance of the reverse mortgage. The borrower will be allowed to keep any excess proceeds and the lender will be allowed to claim insurance if the proceeds are deficient.
What happens when the borrower stops using the mortgaged property as his principal residence?
If the borrower stops using the mortgaged property as his principal residence for a period of 12 months (e.g. when for practical or health reasons, the borrower transfers to a nursing home), then reverse mortgage foreclosure proceedings may be initiated by the lender.
However, if a co-borrower continues occupying the mortgaged property, then the home cannot be foreclosed as long as the co-borrower continues to comply with the reverse mortgage requirements.
What happens when you default on a reverse mortgage?
A borrower is in default when he fails to comply with the ongoing conditions of the reverse mortgage, namely the continued payment of real property taxes and homeowner’s insurance, as well as the continued upkeep or maintenance of the home so that it complies with the government-imposed standards.
If you were the lender, can you foreclose on a reverse mortgage right away in the event of default?
No, lenders cannot immediately seek foreclosure. They must first serve notice of the default and give the borrower an opportunity to correct the alleged issues.
So, can a home with a reverse mortgage be foreclosed? Yes, it can but for very few reasons. Whatever the reason for the reverse mortgage default, however, you should definitely seek professional advice if you believe that you have a valid reason to contest the alleged default.
We hope you have found this content helpful! If you have any questions, please don’t hesitate to give us a call at (844)230-6679. We’d be happy to provide you with a free and no-obligation guidance.