Update: The Federal Housing Administration (FHA) has imposed a foreclosure and eviction moratorium through December 31, 2020, for homeowners with FHA-insured single-family mortgages, including FHA-insured reverse mortgages, due to the coronavirus crisis. Furthermore, mortgagee Letter 2020-06, issued April 1, 2020, provides official guidance for the servicing of FHA loans, including reverse mortgages. It instructs mortgagees (lenders) to, upon request, delay submitting a request to HUD to call a loan due and payable for six months, with an additional six-month extension available with HUD approval. (In some circumstances, the lender has to get HUD's permission to accelerate the loan. Other times, the loan becomes automatically due and payable.) For loans that have become automatically due and payable, entered into a deferral period, or became due and payable with HUD approval, the lender may also delay foreclosure for up to six months. If needed, an additional period of up to six months may be approved by HUD. This kind of suspension, which is consistent with a CARES Act forbearance, means you can delay a reverse mortgage foreclosure for up to a year. But you need to request the delay from your loan servicer; it's not automatic. The lender has to waive all late charges, fees, and penalties, if any, while you're in an extension period.
Reverse mortgages are often hyped as a great way for senior citizens to easily get extra spending money. While reverse mortgages offer a few advantages, they also have significant downsides. For one thing, a reverse mortgage might be foreclosed in a number of different circumstances. Also, they tend to be expensive.
Before you take out a reverse mortgage, learn how they work, as well as the advantages and notable disadvantages associated with these kinds of loans.
The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM) that's insured by the Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD). Reverse mortgage salespeople sometimes use the fact that the loan is federally insured as part of their sales pitch as though this insurance somehow benefits the borrower. It doesn’t. The insurance program helps the lender. The insurance kicks in if the borrower defaults on the loan the home isn't worth enough to pay back the lender in full through a foreclosure sale or other form of property liquidation. In those cases, the FHA will compensate the lender for the loss.
“Jumbo” reverse mortgages also exist for homeowners with very high-value homes, but almost all reverse mortgages are HECMs.
With a typical mortgage, the borrower gets a lump sum from the lender, and then makes monthly payments, which go towards repaying the loan, plus interest. With a HECM, the borrower (who must be age 62 or over) uses the equity in a home as the basis for receiving cash payments. The borrower typically receives monthly payments from the lender or gets a line of credit upon which the borrower makes draws, which become the loan. The loan gets bigger each time the lender sends a payment, or the borrower makes a draw, until the maximum loan amount is reached. The borrower can also choose to get a lump sum, subject to limitations. Federal law limits the amount the borrower can get in the first year of the loan to the greater of 60% of the approved loan amount or the sum of the mandatory obligations—like existing mortgages and other liens on the property—plus 10% of the principal limit.
The homeowner doesn’t have to repay the loan unless and until specified events happen, as explained below. Mortgage lenders and brokers often portray reverse mortgages as though there’s little to no risk of losing the property to foreclosure. Sounds like a deal that’s too good to pass up, right? Not so fast. People who’ve taken out a reverse mortgage can lose their homes to foreclosure, sometimes for relatively minor violations of the mortgage contract. The lender usually gets its money back, and more—why else would they make these loans?
Reverse mortgages offer some advantages. If you have a lot of equity in your home but not much cash, a reverse mortgage might be a good way to get money. Also, HECMs are nonrecourse, which means the lender can’t come after you or your estate for a deficiency judgment after a foreclosure.
But reverse mortgages have significant disadvantages and become due and payable—and subject to foreclosure—when:
Seniors have often found themselves facing a foreclosure after the lender calls the loan due because of mortgage violations like failing to give the lender proof of occupancy, failing to pay insurance premiums, or letting the home fall into disrepair.
Generally, if the lender calls the loan due, the borrower—or heirs if the borrower has died—must pay off the debt (or pay 95% of the current appraised value to the lender, whichever is less), deed the property to the lender, or sell the property (for the lesser of the loan balance or 95% of the appraised value). (FHA insurance covers the remaining balance). Otherwise, the lender will foreclose.
On March 18, 2020, due to the coronavirus outbreak, HUD announced it will halt the initiation and completion of foreclosures, including reverse-mortgage foreclosures, for 60 days for single-family homeowners with FHA-insured mortgages.
Heirs who want to work out a way to pay off a reverse mortgage and keep the home, or sell it to repay the loan, often face months of red tape, frustration, and often foreclosure when dealing with the loan servicer. Shoddy loan servicing practices often hinder what should be routine paperwork, interest calculations, and communications with heirs. (To learn more about these obstacles, see Nolo's article If I Get a Reverse Mortgage, Can I Leave My Home to My Heirs?)
Not only could the lender call the loan due in any of the above-described situations, a few of the other downsides to reverse mortgages include:
Because you get money now and don’t have to pay it back until much later (theoretically), a reverse mortgage might initially sound very appealing. But, because of the drawbacks associated with these loans, it’s a good idea to consider other options if you’re facing financial difficulties. You could, for instance:
If, after considering all the downsides to reverse mortgages you’re still thinking about getting one, consider talking to a trusted financial planner, elder-law attorney, or estate planning attorney in addition to a meeting with a HUD-approved counselor (which is a required step when you get a HECM). For more general information about reverse mortgages, go to the AARP website. Also, beware of common reverse mortgage scams.
If you need help avoiding a foreclosure, consider talking to a foreclosure attorney.