Reverse Mortgages And The Foreclosure Risk

By: Lance T. Denha, Esq.

Contrary to marketing ads for years as seen on TV, internet, newspaper publications, etc., Reverse Mortgages are not full proof when it comes to running the risk of foreclosure.

Reverse Mortgages are programs designed to enable seniors who are age 62 years and older to convert part of their home equity into cash. They can do this without having to sell their home or give up the title. Seniors do not have to take on any new mortgage payments either. Instead of making monthly payments to a lender, the reverse mortgage lender makes payments to the senior homeowner. Estimated proceeds from reverse mortgages can be calculated using several factors including age, interest rate, value of the home and location of the property.

Reverse mortgage proceeds are completely tax-free and most of the time will not impact social security or Medicare benefits seniors may already be receiving. Borrowers have the option to collect their money as a lump sum, as a line of credit or receive the money through monthly payments for as long as the home remains occupied as the primary residence of the senior citizen.

Reverse Mortgages are not for everybody.  The use of this product must be assessed on a case by case basis.  While beneficial for some, for others there is a risk of potential loss of the home if there is a lack of preparation.

For elders seeking out such a loan, the primary benefits to a reverse mortgage includes the fact that the loan does not need to be repaid during the lifetime of the borrower. Also such reverse mortgage loans are insured by FHA since Home Equity Conversion Mortgage (HECM) program’s initiation of reverse mortgages.

However, on the reverse side, the disadvantages or pitfalls of reverse mortgages include the limits set by the FHA in which prevent lenders from giving seniors the full value of the house as it is capped by maximum lending limits. As of late October, 2017, HUD announced new rules that have increased initial premiums and new rules and tightened lending limits. Also, because a reverse mortgage involves payments to a senior over the age of 62, reverse mortgages can become “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. Hence counseling for these types of loan products are mandatory and should be disclosed in great depth and detail from any professional recommending these types of products to the elderly.