If you qualify, a reverse mortgage may help you avoid foreclosure. But in certain circumstances, the reverse mortgage itself may also be subject to foreclosure.
A reverse mortgage is available to senior citizens, aged 62 or over, and essentially uses equity in a home as the basis for cash payments to the senior. Seniors can utilize these payments to supplement Social Security and other income.
Because a reverse mortgage involves payments to, not from, a senior, the reverse mortgage only becomes “due and payable”--and subject to foreclosure--when the senior:
- Passes away: If the senior dies, the heirs can pay off the debt, deed the property to the lender, or sell the property for at least 95% of the appraised value (or pay 95% of the current appraised value to the lender). Otherwise the lender will foreclose.
- Sells their home: If the senior sells their home, foreclosure is rarely required. Profits from the sale are used to pay off the reverse mortgage and other liens and taxes. Additional profits are put into the senior’s estate.
- Moves elsewhere: If the borrower moves to a nursing home, most lenders offer the borrower one year to return to the home. If the borrower does not return in that period, he or she will need to repay the reverse mortgage. If not, the lender can foreclose. However, if the borrower simply moves out of the home, and even rents it out, the lender will require repayment immediately, or can move to foreclose.
- Cannot or will not pay homeowners insurance or property taxes on the residence to which the reverse mortgage is tied: If the borrower cannot pay taxes and insurance on the property, the lender may advance the funds to the lender for those bills initially. If repayment cannot be made, foreclosure may result.
- Allows the residence to fall into serious disrepair, and does not make necessary repairs: Lenders need properties to be in good condition to get their money back. If repairs are needed and not made, they reserve the right to foreclose on a reverse mortgage.
In each of these instances, the reverse mortgage becomes due and payable and the home is subject to foreclosure.
If you're thinking about obtaining a reverse mortgage, see this page on the benefits and risks first.
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