Reverse Mortgage Foreclosure: Everything You Need To Know

Any retiree can tell you that retired life is expensive – but what happens if a senior citizen with a reverse mortgage falls behind on their property taxes and is at risk of losing their home? What options does someone have if their spouse had a reverse mortgage but did not include them in the terms of the loan or the title? If you are facing a reverse mortgage foreclosure or want prepare for the future, read on for details ranging from the types of reverse mortgages to your options to avoid foreclosure.

A reverse mortgage is a loan based on the equity you have in your primary residence. Typically, retired individuals or couples take out reverse mortgage loans to redress living expenses that outpace what the borrower has set aside for retirement.

For homeowners age 62 or older, a reverse mortgage loan can supplement your retirement income to help you afford the cost of living. If the home isn’t completely paid off, the mortgage payments may become optional, or your lender will use some of the funds from the reverse mortgage to satisfy the remaining mortgage amount.

Though some private lenders offer these loans, most borrowers utilize Home Equity Conversion Mortgages (HECM) since the Federal Housing Administration (FHA) insures them. Homeowners who take on a reverse mortgage still must pay property taxes and home maintenance costs.

A reverse mortgage foreclosure occurs only in specific instances per the conditions of the loan, such as the borrower’s death. When one of the qualifying events transpires, the lender is owed the reverse mortgage loan balance. The owners of the home or the heirs of the former homeowner are responsible for paying back the lender.

Types Of Reverse Mortgages

There are three types of reverse mortgages, and each of them is subject to reverse mortgage foreclosure conditions. Depending on where you live and your income level, you may be able to access one or more of these options. Note that with a reverse mortgage, your lender will most likely not require you to make monthly payments on the loan. Whether you make payments or not, interest will continue to accrue on the loan amount.

• Single-purpose reverse mortgages are specific to certain states, governmental agencies, and nonprofit organizations. Borrowers with a low- or medium-income level can qualify more easily for this loan.
  
  While single-purpose reverse mortgages are often less costly than the other types to take out, the funds from the loan can only be used in a certain way, and the lender must approve it. Conversely, you can spend the money from HECM loans and proprietary reverse mortgages in the way you choose.
• Home equity conversion mortgages are insured by the FHA and safeguard the borrower in numerous ways. A good credit score is not critical to qualify for HECM.
  
  Additionally, the homeowner will never owe more than their home’s value because the FHA insurance is in place to make up the difference. These protections make HECM a much less risky choice for all who qualify.
• Proprietary reverse mortgages have no loan limits, unlike HECM loans (for 2022, a borrower will receive funds based on a home value of $970,800 or less, even if their home is worth more). They do not have fees associated with FHA insurance but may have higher interest rates than the average HECM loan. 
  
  With most lenders, proprietary reverse mortgages will only pay out in a lump sum, while HECM gives borrowers the options of monthly installments, lump sum, and a line of credit. Proprietary reverse mortgages are most useful for homeowners who expect their home to appraise for an amount well over the HECM limit.

Rocket Mortgage^® does not currently offer reverse mortgages but does offer the alternative cash-out refinance.

Numerous conditions can give rise to a reverse mortgage foreclosure, and only one of these events needs to occur for the foreclosure process to get started. If you take out a reverse mortgage, be sure to review the instances in which a foreclosure would take place. The following are common to most reverse mortgages.

• The borrower passes away, and the borrower’s spouse is not on the loan.
• The property is sold or title is transferred.
• The borrower doesn’t use the home as their primary residence.
• The borrower hasn’t lived in the home for longer than 12 consecutive months.
• The borrower misses payments (property taxes or homeowners insurance).
• The house is not maintained. 

If one of the events mentioned above occurs, the process for a reverse mortgage foreclosure begins. Since most reverse mortgages are HECM loans, the steps below are regarding the timeline for a HECM foreclosure. Extensions may not be available for single-purpose reverse mortgages and proprietary reverse mortgages. No matter what kind of reverse mortgage you have, having constant communication with your loan service provider will help you better navigate the process.

• Within 30 days of the loan service provider becoming aware of the event, they send a “Due and Payable” letter in the mail to the home, which gives the surviving spouse or heirs six months to sell the home or otherwise pay off the loan.
• The foreclosure timeline is based on the date of the triggering event and not the date that the loan service provider becomes aware of it. Notifying the loan service provider as soon as possible is crucial to preventing a reverse mortgage foreclosure.
• Within 6 months, responsible parties must pay the loan, and the loan service provider is required to send a preforeclosure notice.
• If responsible parties have not paid the loan within the 6-month time frame, they can request a 3-month extension up to two times. The Department of Housing and Urban Development (HUD) must approve the extensions. The survivor spouse or heirs must give proof of their continuing attempts to refinance or sell the property to obtain approval.
• After the two 3-month extensions expire and the debt is still not paid, the loan service provider can foreclose on the house. The time frame for the foreclosure will depend on your state of residence.

• Retain ownership of the home by refinancing to a traditional mortgage. Rocket Mortgage offers conventional mortgages to help individuals and families facing reverse mortgage foreclosure. We also offer financing options, such as a cash-out refinance, to help homeowners afford different expenses.
• Communicate as early and frequently as you can with the loan service provider. Open communication is key to delaying a reverse mortgage foreclosure, especially if you have to apply for extensions.
• If your loan service provider has one available, a repayment plan is a great way to keep your home. Contact your service provider to determine if you qualify.
• Connect with a HUD counselor for information. HUD counselors are equipped to give pointers to help avert foreclosure.
• Selling the home can provide the amount necessary to pay back the reverse mortgage loan.
• Pay off the debt with cash. If you have the funds available, you can keep the property and get rid of the reverse mortgage loan.

Foreclosure Protections For Reverse Mortgage Borrowers

HECM loans have traits that mitigate the financial damage for the borrower in the case of a reverse mortgage foreclosure. At the beginning of the reverse mortgage process, borrowers must attend a 90-minute counseling session. Approved by HUD, the counseling session educates the borrower on the loan details, what fees they must pay, and other available financial choices.

As noted in the foreclosure timeline above, two 3-month extensions are available for HECM borrowers or heirs struggling to avoid foreclosure. HUD provides final authorization for any extension request.

Additionally, when trying to avoid reverse mortgage foreclosure with a HECM loan, the borrower or responsible parties can return the deed to the home to the loan service provider, and the reverse mortgage foreclosure will not occur. Also, the borrower’s credit score will not be damaged.

If you are the surviving spouse of someone who took out a reverse mortgage but did not incorporate you in the loan or the title to the home, you may qualify as a nonborrowing spouse. An eligible nonborrowing spouse can keep their home by meeting these five criteria:

1. You are not behind on property tax and insurance payments
2. You care for the property according to the HECM loan conditions
3. You were lawfully married to the homeowner
4. The home was your primary residence while the HECM was in effect
5. You have the right according to the law to hold the title to the home within 90 days of your spouse’s passing

Again, HECM reduces risk for borrowers. However, other kinds of reverse mortgages present more risks to borrowers or their next-of-kin. For example, responsibility heirs may take on the ownership of the home and mortgage upon the borrower’s death, which can impose financial burdens if those family members are not prepared.

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.

Reverse mortgages can be an excellent option for seniors struggling to make ends meet. However, when certain events take place to initiate a reverse mortgage foreclosure, the borrower, surviving spouse, or responsible heirs need to take action to prevent extreme loss due to foreclosure. Working with your lender can help you avoid foreclosure. If you’re exploring property finance options, learn more about a cash-out refinance with Rocket Mortgage.