March 16, 2018 by HECM Pro
What’s unique about a reverse mortgage is that foreclosure is also a normal part of the program that applies even if the borrower does everything they’re supposed to. Intrigued? I’ll explain.
Before we discuss when a reverse mortgage can go into foreclosure, let’s first cover some basics about what a reverse mortgage actually is. There are many misconceptions about the reverse mortgage and it’s essential you understand at least a few basics before I can adequately address the foreclosure issue.
HECM Reverse Mortgage Basics
The most common reverse mortgage product by far in America today is the FHA-insured and regulated home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, it’s likely they got a HECM.
The HECM reverse mortgage is a type of home loan that enables homeowners 62 or older to convert a portion of the value of their homes into cash without giving up ownership of the home or taking on a mortgage payment. As long as at least one borrower is living in the home and paying the required property charges, no mortgage payments are required and the loan does not have to be paid back.
The reverse mortgage only has to be repaid when the last borrower permanently leaves the home, whether through selling, passing away, or moving into a nursing home.
If the home isn’t worth enough to settle the entire loan balance, FHA picks up the shortage. Any equity that remains in the home after paying off the reverse mortgage will go to borrower’s heirs.
The HECM reverse mortgage is highly flexible and can be tailored to each borrower’s unique financial goals and situation. Proceeds can be structured in the form of a line of credit, lump sum, monthly term or tenure “paycheck”, or some combination of all of these options.
Proceeds can be used for just about any purpose you can think of. Many borrowers choose to eliminate mortgage payments or other debt payments, supplement income, supplement retirement assets, or fund home improvements or travel.
When Can a Reverse Mortgage Go Into Foreclosure?
When you hear (or read) the word “foreclosure”, what kind of images does that conjure up in your mind? Probably some pretty negative stuff, right? You’re probably thinking something along the lines of families experiencing hard times, falling behind on mortgage payments, and being forced out of their home as it’s being sold on the courthouse steps. Am I pretty close?
Stripped of the emotional connotations, the term “foreclosure” at its most basic level simply means the sale of a property by a lender to recover a mortgage balance. That’s true of forward and reverse mortgages. The big difference is this: with reverse mortgages, foreclosure doesn’t necessarily imply that a borrower fell on hard times and failed to meet their obligations under the loan. Yes, it can mean that, but not always.
There are two scenarios, one negative and one positive, where foreclosure applies to a HECM reverse mortgage:
- When program obligations are not met. The most basic program obligations are to keep up with required property charges, such as property taxes, homeowner’s insurance, etc., and live in the home. As long as at least one borrower continues doing these things, the loan very likely will never be called due. If the borrowers stop paying their property charges or move out of the home, it’s considered a maturity event that makes the reverse mortgage due and payable. If the borrower fails to repay the balance in full, the lender is required by HUD to begin foreclosure proceedings.
- When the last borrower permanently leaves the home. Foreclosure also can apply even if the borrowers have met all their program obligations. If the last borrower passes away, it triggers a maturity event. The home passes to the heirs and the heirs have the choice of paying off or refinancing the balance to keep the home, or they can sell it, pay back the reverse mortgage, and keep any remaining equity. If the heirs choose not to keep the home and don’t want to mess with selling, the lender will step in and sell the home to recoup the loan balance through a foreclosure action. Any remaining equity will go to the heirs.
So, can a reverse mortgage go into foreclosure? Absolutely! And when can a reverse mortgage go into foreclosure? In short, it can happen one of two ways. Either the borrower fails to meet program obligations, or the last borrower has met all program obligations perfectly but is no longer permanently living in the home.