Reverse mortgage foreclosure: Everything you need to know

Reverse mortgages allow eligible homeowners to borrow their home equity without having to make a monthly mortgage payment. But failing to meet other obligations under the loan can result in a reverse mortgage foreclosure. It’s natural to be dismayed if you get a foreclosure notice, but you may have options if you receive one.

Rocket Mortgage^® doesn’t originate or service reverse mortgages. But we want you to understand your rights and options if you find yourself in jeopardy of losing your home.

What is a reverse mortgage foreclosure?

Reverse mortgages are nonrecourse loans. This means that borrowers and their heirs can’t be held responsible for paying the lender more than the property would be worth in a sale. Because of this, the borrower or their heirs have the option to give the property back to the lender, and there’s no further obligation or credit impact.

However, not meeting other obligations under the reverse mortgage can result in a foreclosure. For example, if you don’t pay the property taxes or the homeowners insurance bill or fail to keep up with the maintenance, the lender can take back the property before the last borrower or eligible nonborrowing spouse dies or moves away.

Regardless of whether you voluntarily give up the home or are foreclosed upon, lenders can’t pursue deficiency judgments due to the nonrecourse nature of reverse mortgages.

Types of reverse mortgages

The conditions under which your reverse mortgage can be foreclosed upon may depend on factors including local and state foreclosure law, your property type, and the type of reverse mortgage you have. The following are the various reverse mortgages available:

• Home Equity Conversion Mortgages: HECMs are federally backed reverse mortgages provided through the Federal Housing Administration. Available with a variety of interest rates, as well as loan or line of credit structures, these are by far the most common type of reverse mortgage.
• Single-purpose reverse mortgages: Offered by some states and nonprofits, these reverse mortgages require that the proceeds be used for specific objectives defined in the loan documentation.
• Proprietary reverse mortgages: Proprietary reverse mortgages are offered by private lenders under varying terms and aren’t government-backed.

Because HECMs are the most common type of reverse mortgage, this article will focus on general foreclosure conditions for these loans.

What triggers a reverse mortgage foreclosure?

Several events may trigger a foreclosure of a reverse mortgage:

Death of the borrower with no other borrowers or eligible nonborrowing spouses living in the home. Servicers may defer this up to 6 months – a year with approval from the Department of Housing and Urban Development, or HUD – so heirs can decide how to pay off the loan.

• Property sale or other house title transfer – a due-on-sale clause.
• The borrower is no longer using the home as a primary residence.
• The property isn’t occupied by a borrower or eligible nonborrowing spouse for a period of more than 12 consecutive months because of physical or mental illness.
• Failure to pay property taxes or homeowners insurance premiums.
• The property becomes distressed due to a lack of maintenance.

You should refer to your loan documentation for a full list of events that trigger default procedures on your reverse mortgage.

Reverse mortgage foreclosure timeline

Reverse mortgage foreclosures follow a specific timeline and process. Here’s what you should know about the way things work.

1. A triggering event happens

It’s important to note that the process that could eventually lead to the foreclosure of your home takes place the day of the triggering event and not the day of a servicer’s notice. As an example, a triggering event would be the death of the last borrower or nonborrowing spouse. 

It’s important to notify the servicer as soon as possible, which will give you time to consider your options. However, please note that since some of this information is based on self-reporting, lender notifications may not be immediate.

2. The servicer sends notice to owners or heirs

Once your servicer finds out about someone’s passing or another event triggering your reverse mortgage to come due, you’ll get a “due and payable letter” within 30 days.

Generally, you have 6 months prior to any foreclosure being initiated from the time of the triggering event. If it’s not resolved by the end of that, your home could be foreclosed on.

When getting communications, it’s important to know that your servicer may or may not be your original lender. The servicer is the one who has been sending you payments and notices about the loan up to this point.

3. Owners or heirs can request extensions

HECM borrowers have the right to request extensions to the original 6-month timeline that would be approved by HUD. For the extensions to be granted, you have to show evidence that you’re trying to sell the home, refinance, or otherwise pay off the loan in full.

4. Foreclosure occurs if the reverse mortgage isn’t settled

Foreclosure is likely to occur if the original timeline and any granted extensions have passed. You should also look into state and local laws to the extent that they may affect the timeline. If foreclosure happens, borrowers or their heirs will have to remove belongings by the sale date and find somewhere else to live if necessary.

One piece that’s less penal than a traditional foreclosure is the fact that reverse mortgages are nonrecourse loans that won’t affect your or your heirs’ credit moving forward.

Tips for avoiding reverse mortgage foreclosure

If you’re facing reverse mortgage foreclosure, stay in communication with your servicer so that you have a full understanding of your available options. Here are some of the common avenues to think about.

Know your rights as a borrower

The first thing to be aware of is that eligible nonborrowing spouses may remain in the home after the death of the last borrower for all loans closed after August 4, 2014, if they meet the following conditions:

• They were married to the borrower at the time the loan closed and remained married to them during their lifetime
• They are named as a nonborrowing spouse in the loan documents
• They occupied the home as their principal residence and continue to do so
• Certification from the borrower at closing that they are an eligible nonborrowing spouse
• They must certify as an eligible nonborrowing spouse at closing, at the death of the borrower, and every year thereafter for as long as you remain in the property

If your loan closed before the 2014 date, you can still live in the home if approved by the servicer as a nonborrowing spouse.

Beyond built-in survivor provisions, you can request the available extensions discussed above for more time to figure out what to do with the property. You can also give the property back without going through the stress of a foreclosure with a deed-in-lieu of foreclosure.

Work out a payment plan with the servicer

In some cases, your servicer may be able to set up a repayment plan for you to pay back outstanding property charges that the servicer has advanced on your behalf.

Consider refinancing the reverse mortgage

If your heirs want to keep the property, they can consider refinancing for the lesser of the outstanding loan balance or 95% of the appraised value.

Whether you go with a conventional mortgage or another loan type, it’s important to consider closing costs and the fact that you’ll need to be able to afford the monthly payment.

Use cash to pay off the loan

Although you may not have the resources to do this, one option for getting out of a reverse mortgage is to pay off the loan with cash. It’s often not feasible, but it could be a good solution if you have the resources and want to keep the home in the family.

Sell the property

You can sell the property to pay off the loan. If there are proceeds left over, you would be able to keep them. If the home doesn’t sell for the remaining loan balance, the lender can’t pursue a deficiency judgment. The only requirement is to sell the property for at least 95% of the fair market value as determined by an FHA appraiser.

Work with a HUD counselor

If you’re not sure what to do and want a third-party to work through your options and help you determine what makes the most sense in your situation, HUD does make housing counselors available. You can check out their online directory to find one in your area.

Reverse mortgage foreclosure risks

While HECMs offer some risk reduction for borrowers, other reverse mortgage options may carry higher risks to borrowers or their heirs. For example, if a surviving spouse or heir inherits the responsibilities of a mortgage upon a borrower’s death, it may impose a financial burden that can lead to foreclosure.

Additionally, in the case of a living borrower who experiences a reverse mortgage foreclosure, the lender may implement a deficiency judgment against you if the sale of your former property does not satisfy your debt.

The bottom line: Know your options if you’re facing reverse mortgage foreclosure

While reverse mortgages don’t have a required monthly payment, your home can be foreclosed upon for violations of the terms. Usually, the last borrower or eligible nonborrowing spouse dies or moves out of the home. In this case, the borrower or their heirs have several options, including giving the property back to the lender.

Be sure to consult with your servicer about all the options you have. While Rocket Mortgage doesn’t originate or service reverse mortgage loans, we can help you refinance a reverse mortgage into a traditional mortgage. To see if you qualify, apply online.