Timeline of a Reverse Mortgage Loan
A reverse mortgage is due and payable when the homeowner of the mortgaged property passes away. As such, a reverse mortgage foreclosure is theoretically possible.
If necessary, the lender on the reverse mortgage may need to pursue foreclosure proceedings in order to receive payment on the loan. However, this is typically seen as a last resort, and there are things you are able to do to ensure this does not occur.
Timeline of a Reverse Mortgage Foreclosure Process
A reverse mortgage, also referred to as a home equity conversion mortgage (HECM), is due and payable upon the occurrence of one of several possible scenarios:
1) The mortgaged property is sold or title to it is the subject of a transfer.
If you sell your mortgaged property or you decide to transfer title to it, your reverse mortgage loan will become due, and it is necessary to be prepared in such an event.
Typically, an escrow company will use the proceeds of such a sale to pay any outstanding liens, including the reverse mortgage loan. Once title is transferred, the loan then comes due.
2) You cease using the property as your principal place of residence.
If you have a reverse mortgage, once you stop living in the property as your principal place of residence, or after you are deceased your spouse stops living there, the mortgage loan is due and payable. At this point, you must either return to the home and use it as a primary residence or simply pay the outstanding balance on the loan.
It is also possible for you to sell the home for whichever amount is lesser: the remaining mortgage balance or 95% of the home’s appraised value and then repay the mortgage loan. Failing that, you may choose to give a deed in lieu of foreclosure or wait for the loan servicer to initiate foreclosure proceedings.
3). Illness prevents you from residing in the home for more than 12 consecutive months.
A reverse mortgage loan will also become due and payable if you are unable to occupy the mortgaged residence for 12 months in a row because of physical or mental illness and nobody else who is on the mortage loan is using the home as a primary place of residence.
In order to clear the debt, you may simply pay the outstanding balance, remedy the breach by occupying the home again, or sell the home for the lesser amount of the remaining loan balance or 95% of the home’s appraised value and pay the balance with those proceeds.
4) You fail to live up to loan conditions and obligations.
Reverse mortgage loans require you to keep up with property taxes, perform required maintenance and repair work on the home, and keep mortgage insurance coverage in place. The precise parameters of these requirements will be spelled out fully in the mortgage agreement itself.
It must be noted that a homeowner’s failure to do any of these things represents a breach of the contract, and the lender is free to call the loan due. However, most lenders are willing to offer an opportunity for a borrower to cure any such default so that the hassle and expense of foreclosure proceedings can be avoided.
Reverse Mortgages and Inheritance Issues
If you happen to inherit a piece of property that is subject to a reverse mortgage, it is wise to get in touch with the lender right away and keep the lines of communication open before you make a final decision about how you wish to proceed.
You will be sent a notice by the lender informing you that the loan is due and payable, and the law affords you 30 days to declare your intentions with regard to the home. This is an important window of time, because you might feel unsure as to the best way to move forward.
You will be given a period of six months to repay the outstanding loan balance or buy the property for 95% of its appraisal value. The debt can be repaid either by simply selling the property or drawing on other sources of funding. Your decision will likely depend on whether you have an interest in retaining the property or you simply need to ensure that the debt obligation is satisfied.
Foreclosure Extensions for Reverse Mortgages
Those who inherit property that is subject to a reverse mortgage may be confused as to their options, and it is important to note that such individuals are allowed to seek two extensions of 90-days each beyond the first declared deadline. Loan servicers may even assist someone in this position with the process of securing approval for the additional time.
If you find yourself in this circumstance, during this period you will need to prove that you are taking active steps to repay the outstanding debt. It will also be necessary for you to provide status updates to the mortgage servicer every 30 days for the duration of the extension. The key is to show good faith and diligence in terms of making arrangements to make good on the loan, one way or another.
If you do not respond or remain in communication with the lender, or you allow the 90-day periods to expire without satisfying the debt obligation, foreclosure proceedings may be initiated. Familiarizing yourself with the legal requirements involved and the options afforded to you at this time will help you make a truly informed decision about the property.
How Death Impacts Reverse Mortgages
When a borrower death occurs, a reverse mortgage lender needs to be informed of the fact no later than 30 days after the event itself. If it is the case that all named borrowers on the mortgage have died, those who inherit the property can:
- Repay the loan and retain ownership of the home
- Sell the home and use those proceeds to satisfy the debt
- Give the lender a deed to the property
- Allow foreclosure proceedings to begin
A spouse who was not named as a borrower on the reverse mortgage loan may be able to remain in the home following the named borrower’s death and receive a deferrment on the loan payment, provided that certain specified conditions are met.
The Bottom Line on Reverse Mortgages
Reverse mortgages are fairly complex financial arrangements, and too many homeowners who enter into these contracts fail to grasp the full range of terms and conditions involved. Sadly, such a lack of knowledge can result in a foreclosure, which is never a desirable outcome, either for borrowers or heirs who may be left to manage their estate following a death.
If you are contemplating a reverse mortgage, or you are currently a party to such a loan agreement, you may wish to secure the assistance of a loan professional who can guide you through the specifics and help you sidestep costly mistakes.
When used skillfully, reverse mortgages can be a valuable tool when it comes to planning and enjoying your golden years, but without the right information, they can lead to disappointment and unfortunate financial outcomes for you and your loved ones. As such, it really does pay to enlist the guidance of an expert.