4 Min. Read

Can a Reverse Mortgage Result in Foreclosure?

4 Min. Read
house and grass

In rare instances, a reverse mortgage can end in foreclosure. However, the situations that lead to a reverse mortgage foreclosure are typically much different than traditional mortgage foreclosures.

When homeowners think of foreclosure, they think of the most common reason traditional or forward loans end in foreclosure—failure to make the required monthly mortgage payment. Of course, that wouldn’t make sense with a reverse mortgage since it carries no monthly repayment obligation. 

Can a Reverse Mortgage be Foreclosed?

As mentioned, it is possible for a reverse mortgage to be foreclosed. Reverse mortgage foreclosure typically happens when:

  • It’s the natural resolution of a reverse mortgage after the borrower passes away.
  • The balance due exceeds the home’s value.
  • There is no next of kin to handle a sale.

Even though reverse mortgages don’t require a monthly principal and interest mortgage payment during the life of the loan, there are other borrower obligations contained in the reverse mortgage loan agreement. The borrower has agreed to occupy and maintain the home as well as pay all property-related charges. Failure to do these things will cause the loan to mature. When a loan maturity event happens, the borrower or their beneficiaries will often sell the home to pay off the loan balance.

What Is a Maturity Event?

A “maturity event” is a term used to describe the life stage of the loan when:

  • The borrower or a beneficiary sells the property.
  • The last surviving borrower leaves the home for 12 consecutive months due to illness.
  • The borrower does not maintain the property.
  • The borrower passes away.

When one of these situations occurs, the borrower or one of their beneficiaries will often notify the lender of their intentions to sell the home. The lender will typically allow them six months to sell the home, and the Department of Housing and Urban Development (HUD) generally approves two- to three-month extensions for up to one year.

If no action is taken to sell the home, the lender will need to foreclose on the home and handle the sale themselves so that the loan can be repaid.

Most Common Reasons for Foreclosure?

While rare, some circumstances can force a reverse mortgage into foreclose. The most common reasons are when:

  • No equity remains at loan maturity. When the loan matures, the loan balance sometimes exceeds any reasonable potential sale price of the home. In such cases, borrowers have no economic incentive to sell the home on their own. Fortunately for the borrower and their beneficiaries, all reverse mortgages are “non-recourse” loans. This offers them the opportunity to walk away despite a loan deficiency. And this should not impact their credit profile. Foreclosure is the mechanism that conveys title to HUD (or the lender), so they can sell the home and ultimately pay off at least a portion of the loan balance.
  • A property tax default occurs. Failure to pay property taxes will almost always result in foreclosure. This is true whether the homeowner has a reverse mortgage, a traditional mortgage, or no mortgage at all. Lienholders on the home and are required by federal guidelines to foreclose on the property in these situations. Therefore, in 2015, HUD established a required financial assessment for every borrower. This action has dramatically reduced the number of property tax defaults.

Keep in mind, a reverse mortgage naturally allows the homeowner access to funds, which should reduce the likelihood that a borrower will default on their obligations. 

New Protections Against Reverse Mortgage Foreclosures

HUD has implemented two requirements to reduce the number of foreclosures caused by property tax defaults.

  • Initial disbursement limits. These limits were implemented in 2013 for all reverse mortgages insured by the Federal Housing Administration (FHA). For the first year of the loan, many borrowers are limited on withdraws from their calculated proceeds. Unless they have large mortgage payoffs that necessitate higher draws, the borrower may be initially limited to 60% of their funds. As a result, most borrowers keep a portion of their proceeds in a growing line of credit available for future emergencies.
  • Financial assessment. Enacted in 2015, a financial assessment requires the lender to examine the credit history, property charge history, and residual income to determine whether the reverse mortgage is a sustainable solution for the borrower. Some borrowers are required to set aside a portion of the proceeds for the payment of property taxes. This has reduced the number of reverse mortgages nationwide but has also reduced the number of foreclosures.

It’s important to note that, while reverse mortgage foreclosures occur, they happen under a different set of circumstances than with a traditional mortgage. If you’re considering a reverse mortgage, these concepts will be covered in more depth during a mandatory reverse mortgage counseling session.