There are risks associated with obtaining a reverse mortgage from the FHA or a private lender. One reason senior citizens and their families are encouraged to attend credit counseling before obtaining a reverse mortgage is that lenders can foreclose on them during conditions under which the loan officially becomes "due and payable" under the law.
Reasons for a Reverse Mortgage Foreclosure
A qualified homeowner aged 62 or more can apply for a reverse mortgage, putting their house up as security against a monthly check or lump-sum payment from a lender. The senior is not responsible for repaying the mortgage while they reside in the dwelling. However, there are reverse mortgage drawbacks, particularly legal conditions that, once met, require the owner or heirs to repay the loan. Failing that, the property can become vulnerable to foreclosure, whether or not the lender stands to recover the entire amount of the loan or full value for the property.
Due and payable conditions subject to last-resort foreclosures include:
- The passing of the senior citizen owning the property.
- The senior citizen sells the home.
- The home has fallen into disrepair and threatens the value of the property.
- The senior can no longer afford property taxes and homeowner's insurance to protect the lender's investment.
- The senior has moved (for example, to a nursing facility) and not resided in the home for a calendar year.
Reverse Mortgage: What to Do if the Borrower Dies
In the case where the senior citizen signing for the reverse mortgage dies, the heirs can repay the loan, sell the property to repay the loan, deed the property to the lender, or accept foreclosure. If the heirs sell the home, the escrow company can assume the purchase funds and distribute the money to pay off the lender and the heirs with any leftover funds.
According to legal experts NOLO, once the reverse mortgage becomes due and payable, the only way for the homeowner to avoid foreclosure is to settle any defaults and repay any amounts that were loaned to the senior citizen – along with interest and fees that began accruing the first day of the loan. NOLO reports that the heir or homeowner must pay at least 95 percent of the current appraised value to satisfy the lender.
Fanny Mae Recommendations to Avert Foreclosure
If there's still equity in the home, the Federal National Mortgage Association (Fannie Mae) recommends seniors look into a reverse mortgage refinance that can include funds to settle past defaults, taxes, and repair costs on the home.
A penultimate scenario, Fanny Mae says, is a "Deed-in-Lieu of Foreclosure" wherein the homeowner deeds the property to the lender and, in return is released from all financial obligations and, in some cases, receives sufficient funds to resettle elsewhere.
Insurance on Reverse Mortgages
The FHA premiums on reverse mortgage insurance are added to the total cost of the loan, along with origination fees and closing costs. According to HUD, the Mortgage Insurance Premium (MIP) has been reduced for mortgages of terms greater than 15 years assigned on or after January 26, 2016. Essentially the homeowner pays to protect the lender from default. For example, what if the heirs cannot sell the property for the value of the loan? The lender can file an insurance claim to collect the difference as long as the mortgage insurance premiums have been paid.