Because of misinformation surrounding reverse mortgages, some homeowners worry that this type of loan puts them at greater risk of losing their homes. It doesn’t. The truth is, regardless of the type of mortgage, if you don’t pay for things like your real estate taxes, you could lose your house. A reverse mortgage does not put you at increased risk and can be a safe and smart option for qualified senior homeowners as long as you fully understand the loan requirements.
Whether you have a conventional or reverse mortgage, you always risk losing your home if you don’t meet loan obligations. With a traditional mortgage, the typical way that a borrower defaults on the loan is if they don’t make monthly payments. There are no payment obligations with a reverse mortgage, though, so a different series of events trigger a loan default.
Only you and your behavior determine whether you keep or lose your house with a reverse mortgage. What are your obligations, and how does the reverse mortgage application process help minimize risk? Here’s what you need to know.
What Are a Reverse Mortgage Borrower’s Obligations?
When you apply for a reverse mortgage, you agree to uphold the terms of the loan, some of which include:
- Living in the home as your primary residence
- Staying current on all property and loan-required expenses such as homeowner’s insurance, property taxes, and HOA dues (if applicable)
- Maintaining the property according to Federal Housing Authority (FHA) requirements to protect the lender’s interest
If you don’t meet these obligations, you will be in default on the loan. If you do not cure the default, then the loan can be called due and payable.
What If a Borrower Defaults?
Defaulting has many consequences. The most immediate problem for a defaulting borrower living in the home is once the loan has become due and payable and a repayment notice has been issued to the borrower, the lender would stop making payments, if the borrower elected to receive monthly payments. If the loan is in default status, the homeowner’s access to any available funds in the line of credit is frozen. In the event of the death of the last surviving borrower, all access ceases. Any remaining equity is then transferred to heirs when the home is sold and the loan is paid back.
Even so, you will have an opportunity to correct the situation before the lender takes action against you.
If the loan problem isn’t fixed—loan servicers use the term “cure”—the loan will be called due. If you do not repay the loan or work towards selling the home to repay the loan, the lender can initiate foreclosure proceedings. In a foreclosure, the lender sells the home and uses proceeds to pay off the defaulting borrower’s debt.
Protections for Reverse Mortgage Borrowers
Nobody wants senior borrowers to lose their homes, so there are several protections in place that help minimize risk. For starters, mandatory financial counseling with a professional from a HUD-approved housing counseling agency when applying for a home equity conversion mortgage (HECM) helps reduce any borrower confusion about loan obligations.
In addition, updates to the HECM program requirements enacted in recent years provide more protection.
First, many borrowers have limits on how much they can withdraw from loan proceeds during the first year of the loan. Except for those with large mortgage payoffs that require higher withdrawals, borrowers are often limited to 60% of their funds initially.
In addition, before making the loan, the lender must conduct a financial assessment to examine the borrower’s credit history, property charge payment history, and income to determine whether they have the ability and willingness to afford to meet reverse mortgage financial obligations. One outcome of this assessment is that some borrowers must set aside a portion of their loan proceeds for property taxes and homeowners’ insurance.
It’s Up to You
It’s important to note that while reverse mortgage foreclosures occur, they happen under a different set of circumstances than with a traditional mortgage. In certain situations, they’re an unavoidable outcome when the borrower vacates the home. But in others, your ability to meet your loan obligations determines whether you keep or lose the house.
Thanks to updated program requirements and lending procedures, that’s less likely to happen.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.