August 30, 2017 by HECM Pro
Interestingly, foreclosure is also a normal part of the program that applies even if the borrower meets their obligations perfectly. Sound strange? Read on and I’ll explain.
Before we discuss when can a reverse mortgage be foreclosed on, let’s first cover a few basics about what a reverse mortgage is and how it works. There are numerous misconceptions floating around out there and I want to set the record straight before I address the foreclosure issue.
Reverse Mortgage Basics
The most common reverse mortgage product in the United States today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, it’s a good bet it was a HECM.
The HECM reverse mortgage is designed to give homeowners 62 or older the ability to convert a large portion of their home’s value into tax-free cash without taking on a mortgage payment or giving up ownership of the home. As long as you live in the home and stay current with property taxes and homeowners insurance, no monthly payments are required and the loan balance does not have to be repaid.
You always retain title ownership of your home, which means you’re free to will it to your heirs. If your heirs wish to keep the home, they need to pay off or refinance the reverse mortgage balance. If they’d rather not keep the home, they can sell it on their own or let the lender sell it. Any equity left in the home after the reverse mortgage is repaid will go to your heirs.
The HECM reverse mortgage is very versatile and can be tailored to your financial needs and goals. Proceeds can be received in the form of a lump sum, line of credit, term or tenure payments, or some combination of all of these.
The HECM is a non-recourse loan, which means you’ll never leave a big financial mess to your heirs. If the home isn’t worth enough to settle the entire balance, the shortage is covered by the FHA insurance fund.
When Can a Reverse Mortgage Be Foreclosed On?
When you hear (or read) the word “foreclosure”, what kind of images and feelings get conjured up? If you’re like most people, I imagine you’re probably envisioning some pretty negative stuff, right?
If you remove the emotional connotations, the term “foreclosure” simply means the sale of a property by a lender to get repayment of a mortgage. That’s what a foreclosure is, whether we’re talking reverse or forward mortgages. Here’s the big difference, though: with reverse mortgages, foreclosure doesn’t necessarily mean that a borrower fell on hard times and can’t keep up with their obligations. It can mean that, but not always.
There are two possible scenarios where foreclosure applies to a HECM reverse mortgage:
- When the borrower fails to meet their obligations under the program. The HECM reverse mortgage program requires that borrowers live in their homes and keep up with required property charges, such as property taxes, homeowner’s insurance, etc. If the borrower fails to meet these obligations, they risk triggering a maturity event, which makes the reverse mortgage due and payable in full. If a maturity event is triggered and the borrower fails to repay the loan balance, the lender is required by HUD to begin foreclosure proceedings.
- When the last borrower permanently leaves the home. As strange as it sounds, foreclosure also can apply even if the borrower meets their program obligations perfectly. Remember, foreclosure is simply the process by which a lender sells a house to get their money back. If the last borrower dies, they’re no longer living in the home and paying required property charges. This is a maturity event that makes the reverse mortgage due and payable. The home passes to the heirs, who can choose to either refinance or pay off the reverse mortgage to keep the home. Or, the heirs can sell the home themselves and keep any remaining equity once the reverse mortgage is paid back.
If the heirs don’t want the home and don’t want to mess with selling it, the lender will sell the home to recoup their money through a foreclosure action. Any remaining equity will go to the heirs.
So, can a reverse mortgage be foreclosed on? Absolutely! And when can a reverse mortgage be foreclosed on? In short, it can happen in one of two instances: 1) The borrower fails to meet their obligations, or 2) The borrower has met their obligations perfectly, but is no longer living in the home because he or she passed away or went into a nursing home permanently.