Chance of Foreclosures With a Reverse Mortgage
Since reverse mortgage borrowers don't have to make payments,
foreclosure rarely comes into play. But there are occasions
when a foreclosure is used with a reverse mortgage.
Before a reverse mortgage can be foreclosed, it must first be due
and payable. The often quoted times when a reverse mortgage is
due and payable is when:
1. The borrower sells the home.
2. The borrower moves.
3. The borrower dies.
Other occassions are when:
4. The borrower refuses or cannot pay property taxes or
homeowner's insurance.
5. The property is in disrepair and the borrower refuses or
cannot make repairs.
Before any foreclosure action, the lender will issue a repayment
notice advising the borrower that the loan is now due and payable.
If the borrower can correct the deficiency (move back in, pay the
taxes or insurance, or repair the property, the loan can continue as
it was. At about the same time, the lender will stop any
payments the borrower may be receiving and will freeze any funds in
the Line of Credit. If corrections are not made, foreclosure
could begin in one to three months.
Let's look at the 5 typical possibilities:
1. The borrower sells the home. It would be unusual for
foreclosure to be needed. In most sales, escrow is used.
The escrow office will accept the money from the buyer, pay off the
reverse mortgage along with any other liens or costs and give the
left over funds to the seller. If a borrower sold a home to
someone without going through escrow, there could be an issue.
It might be innocently done when selling to a relative. It
might also be done fraudulently by selling to a relative while
wishing to keep access to the reverse mortgage funds or payments.
When the lender learns of this (they have ways), they would issue
the due and payable repayment notice and then move on to
foreclosure.
2. The borrower moves.
If the last surviving borrower moves into a care facility, they have
a 12 month grace period. If they haven't returned to the home
after the 12 months, the repayment notice would be sent.
If the borrower moves and changes their principle residence (perhaps
even renting the home with the reverse mortgage on it) the repayment
notice would go out as soon as the lender learned of this.
3. The borrower dies.
Typically, there aren't any issues here. In most cases the
heirs will sell the home and the lender will be paid off through
escrow. The time frame for the heirs to sell the home are
fairly generous. They initially have 6 months. If they
follow some simple guidelines and request an extension, HUD will
typically allow two 90 day extensions. This assumes the heirs
are making a valid attempt to sell the home. The extensions
are handled on an individual basis based on the facts.
If the heirs determine that the home is worth less than the amount
of the loan, they may not wish to go through the sale process
knowing they would receive no money. When notified, the way
the lender would collect the collateral (the home) would be to begin
the foreclosure process.
4. The borrower refuses or cannot pay property taxes or
homeowner's insurance. If there are still funds available in
the reverse mortgage, the lender will advance funds to pay the
property taxes or insurance. Lenders wouldn't like to
foreclose on a little old lady due to a few hundred dollars for
insurance. They may elect to continue making the payments and
adding the balance on to the principle. Depending on the
dollars involved, they may need to start the foreclosure process.
5. The property is in disrepair and the borrower refuses or
cannot make repairs. This may be handled the same as the taxes
and insurance. However, the disrepair could be a health or
safety issue. Depending on the dollars and condition of the
home, foreclosure many be the only choice.