The Reverse Mortgage Foreclosure Process
Unfortunately for borrowers and their families, lenders are well within their rights to foreclose on a property with a reverse mortgage if the borrower has violated one or more of the clauses in the mortgage agreement. The most common reason why a reverse mortgage lender would foreclose on a property is if the borrower has failed to pay their property taxes, homeowner’s insurance, homeowner’s association fees, or other essential fees.
In rare cases, a borrower could also face foreclosure if they have failed to maintain their property in good condition. However, as long as they have paid all the relevant costs and fees on their property, this is unlikely, as lenders aren’t exactly sending covert inspectors to check on the condition of borrower’s homes. A more common scenario is that a borrower leaves their property in disrepair, is fined by their homeowner’s association (or even a local government), fails to pay, and is then foreclosed upon by their lender.
New Rules are Designed to Reduce The Amount of Reverse Mortgage Foreclosures
In 2015, the federal government instituted a new rule in order to prevent unqualified borrowers from obtaining FHA-insured Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgages in the U.S. Instead of simply having enough equity in their home (usually 50%), a potential borrower will also face a financial assessment to ensure that they can pay the associated fees and costs related to a reverse mortgage. Ideally, this should reduce the amount of foreclosures, as borrowers with little to no savings will no longer be able to qualify.
Ways to Prevent a Reverse Mortgage Foreclosure
There are a few ways to prevent a reverse mortgage foreclosure, but none of them are completely foolproof. No matter what happens, it remains the borrower’s responsibility to ensure that their bills are paid on time and that they are fully complaint with the lender’s rules. The most common safeguard against foreclosure is setting up a Lifetime Expectancy Set-Aside (LESA). Borrowers with lower scores on their financial assessments are actually required to set up a LESA, which sets aside money for taxes, homeowner’s insurance, HOA fees, home repairs, and other costs. A LESA is funded the borrower during closing.
Another method of preventing a reverse mortgage foreclosure is through a monthly withhold of funds. For instance, if a borrower was to receive $2,000 a month from their reverse mortgage, the lender could give them only $1,600, reserving the remaining $400 to pay the borrower’s property taxes and homeowner’s insurance. Of course, neither of these strategies are totally airtight— a LESA is based on the estimated survival age of the youngest borrower, while the withholding process will only work as long as the reverse mortgage payments continue.
How a Reverse Mortgage Foreclosure Actually Works
When a lender sees that a borrower has failed to make their payments, they will typically send a “due and payable” letter. This will usually include:
The loan balance that is due
The potential foreclosure timeline (and how soon they need to respond)
Repayment and foreclosure avoidance options
In many cases, this letter gives borrowers a chance to repay their debts or fees and avoid a foreclosure. However, if the borrower has passed away, moved, or sold the property, a repayment plan will be needed. Assuming the property has not been sold, the borrower or their heirs will typically have about 6 months to either sell the property or determine another way to repay the reverse mortgage. They also will usually provide two 90-day extensions (if requested), as long as the borrower or borrower’s estate can prove they are actively marketing the property or taking other active measures to repay the loan.
Fortunately, if you do decide to sell the property, and it does not fully repay the reverse mortgage, you will not be responsible for paying the difference. However, if there are excess funds (i.e. the reverse mortgage is fully repaid), then you (the borrower or borrower’s heir(s) will receive those additional funds. If you are an heir and you want to keep the home, you may typically pay the balance of the reverse mortgage or 95% of the property’s appraised value, whichever is less.