Understanding Reverse Mortgage Foreclosure Timelines: Causes, Consequences and Risk Mitigation Strategies
Author: Eliza Theiss
Reverse mortgages have become increasingly popular as a financial tool for senior homeowners in need of a loan. This mortgage type was created for older homeowners looking to make use of the equity in their homes without selling or moving. But, just like any other financial tool, they must be used with care and special attention to their specific risks. This is especially true for reverse mortgage foreclosure timelines because about one in 10 reverse mortgages ends in foreclosure.
What Is a Reverse Mortgage?
Reverse mortgages are financial products designed for homeowners aged 62 and older. They allow homeowners to secure a loan using home equity as collateral. Similar to a traditional mortgage, reverse mortgages will not affect the title of the property. Rather, deeded ownership remains in the hands of the borrower and/or any potential co-owners and co-borrowers, such as a spouse.
The key difference between reverse mortgages and traditional home loans is that reverse mortgage holders are not liable for monthly mortgage payments. Rather, reverse mortgages convert a percentage of the owner’s home equity into capital that the borrower can use. So, instead of monthly mortgage payments, the borrower’s loan balance grows over time until it reaches the full stake held by the owner or the value determined by your debt-to-income ratio.
What Is a Reverse Mortgage Foreclosure?
A reverse mortgage foreclosure is the process of a lender taking possession of a home when the borrower of the reverse mortgage does not meet their obligations fully and on time. Specifically, the lender may take possession of the home and sell it immediately to recoup their losses and tied-up equity. Alternatively, the lender may take possession of the home and decide to hold it for the time being, thereby turning the home into a real estate-owned asset.
Causes of Reverse Mortgage Foreclosures
Understanding the causes and timelines for reverse mortgage foreclosures is the first step in minimizing their risk and can eliminate a lot of complications for both the borrower and their heirs. The main causes that kick off reverse mortgage foreclosure timelines are:
- Failure to Meet Obligations
Standard terms for reverse mortgages require the borrower to stay current on property taxes and maintain a homeowner’s insurance policy, in addition to keeping the property in good condition. Failure to successfully fulfill either of these obligations can trigger a loan default — an essential step in reverse mortgage foreclosure timelines.
- Non-Borrowing Spouse Issues
If the borrower passes away and their spouse is not listed as a co-borrower on the reverse mortgage, the loan will often come due and will need to be repaid shortly. If the surviving spouse cannot refinance the loan or repay it in full, a loan default will be triggered, leading to foreclosure. Thus, listing your spouse as a co-borrower is essential to avoid these types of reverse mortgage problems for heirs.
- Decreased Property Values
Your reverse mortgage balance and the appraised value of your home are closely tied: The balance of your reverse mortgage grows in time with the appraised value of your home. For instance, if property values decline, the loan balance can surpass the new appraised value of your home, resulting in negative equity. And, because reverse mortgages are dependent on the equity tied up in the ownership of a home, borrowers must also secure and prove additional assets that can be used to cover the loan’s negative equity.
Understanding the Reverse Mortgage Foreclosure Timeline
The timeline for a reverse mortgage foreclosure can vary depending on the loan agreement’s specific terms; the actions of the borrower (such as whether they attempt to mitigate the default); and any applicable local laws and regulations.
Generally, the timeline of a reverse mortgage foreclosure is a minimum of six months to a year and consists of:
1. Loan Default
If the borrower or their heirs fail to meet their contractual obligations as per the reverse mortgage agreement, this triggers the loan to come due. Most common triggers include:
⇒ failure to maintain the property
⇒ no longer using the property as the primary residence
⇒ falling behind on property taxes or homeowner insurance.
2. First Notice of Default
The lender then sends the borrower a Notice of Default, which is often referred to as a “Due and Payable” letter. This usually occurs within 30 days of the default being triggered. It specifies the reasons for default; the actions needed to remedy the default; and the available timeframe, which is typically a maximum of six months. It’s important for the borrower or heirs to respond and maintain communication with the lender or the lender may begin foreclosure proceedings.
Additionally, some jurisdictions may require the borrower to meet with a HUD-approved housing counselor to explore opportunities to resolve the default in accordance with their financials.
3. Second Notice of Default
If the borrower fails to address the default, the lender issues the second Notice of Default. Often, the second notice also includes a pre-foreclosure notice announcing the lender’s intent to foreclose, should this deadline also pass. The borrower can reverse the default by resolving the issues included in the Notices of Default, most often by making the loan current or paying overdue expenses, such as property taxes.
4. Extensions
If the borrower or heirs cannot settle the loan within the first six months, they can request two 90-day extensions that are contingent upon HUD approval. In order for these extension requests to be approved, the borrower or heirs have to provide proof of ongoing efforts to manage the loan through refinancing, restructuring or the sale of the home.
5. Acceleration Letter
Although not mandatory, lenders can also send an acceleration letter toward the end of the wait period. Acceleration letters officially declare the full loan amount as immediately due and payable.
6. Foreclosure Proceedings
If the borrower (or their heirs) does not resolve the default by the end of the second 90-day wait period, the lender will initiate foreclosure proceedings. While details and requirements vary from state to state, the foreclosure process involves the lender filing a lawsuit against the borrower and securing a court order that allows the foreclosure to finalize.
7. Property Sold
After securing the court order, lenders will often put the home on the market (usually through an auction) as fast as possible in order to recoup their losses. However, until the lender unloads the foreclosed home at an auction, the borrower has the right to sell the property themselves and use the proceeds to pay off the outstanding debt.
Note that, because heirs are responsible for reverse mortgage debt, selling the home prior to a successful foreclosure auction could be more advantageous as any funds remaining after satisfying the mortgage will stay with the borrower (or their heirs) and not the lender.
Furthermore, when the home is sold at a foreclosure auction, the new owner can legally take possession of the home and may start eviction proceedings against the previous owner or their heirs if they have not vacated the home voluntarily.
Reviewing Your Options: Loan Modification & Repayment Plans
If you default on a reverse mortgage, you have a number of options to resolve the situation, depending on the extent and gravity:
A. Work with Your Lender on Repayment Options
In order to avoid a foreclosure, many lenders are willing to work with borrowers who are behind on just a few payments or who are facing temporary financial difficulties. In addition to communicating with your lender, you can also seek advice from a HUD-approved housing counselor or consult with legal and financial advisors.
Repayment options will generally come in the form of a:
-
- Repayment Plan: If you’ve only missed a few payments (especially if it’s a first-time occurrence), the lender could be open to a repayment plan to catch up on the overdue amounts.
- Loan Modification: Lenders may be open to adjusting the terms of the reverse mortgage to make it more manageable for the borrower and to cut down on delinquencies.
B. Sell the Home
If you’re unable to bring the loan up to date, you may want to sell the home and use the proceeds to repay the lender. Depending on the health of and competition within your local housing market, this could prove to be the most financially advantageous option, especially if you manage to sell above the market value. However, it’s crucial to move quickly as a delinquent borrower only has the right to sell until a successful foreclosure auction is finalized. If the sale doesn’t cover the full loan amount, the lender typically cannot pursue you or your heirs for the shortfall.
C. Enter a Deed in Lieu of Foreclosure Agreement
Considered by some as the shortcut around foreclosure proceedings, a deed in lieu of a foreclosure agreement can minimize reverse mortgage challenges for heirs. This is a straightforward agreement between the lender and the borrower or their heirs in which the deed and any claim of ownership are voluntarily handed over to the lender in exchange for stopping foreclosure proceedings. While the end result remains the same, this approach saves lenders money, but will also have a lighter effect on the borrower’s credit score.
D. Allow Foreclosure to Proceed
If you cannot repay the loan through traditional or alternative means, it may be easiest (and, ultimately, cheapest) to simply allow the foreclosure to finalize with no involvement. This is least likely to cause reverse mortgage problems for heirs because it will require no expenses on their part. Plus, reverse mortgages are considered “non-recourse” loans, meaning the lender can take ownership of the home, but cannot pursue other assets owned by the borrower or their heirs.
FAQ
Yes, a reverse mortgage can go into foreclosure. In fact, about one in 10 reverse mortgages ends in foreclosure. Consequently, reverse mortgages problems for heirs are quite common because heirs are responsible for outstanding reverse mortgage debt.
Typically, a reverse mortgage will go into foreclosure within a minimum of six months to a year. Always check local laws, too, as these may influence the timeline.
About 10% of reverse mortgages end in foreclosure.
Yes, heirs are responsible for reverse mortgage debt and must satisfy it within approximately six months or lose the home. If heirs decide to sell the home to repay the reverse mortgage, any proceeds left over from repaying the loan will be divided among heirs.
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Senior Writer
Eliza Theiss is a senior writer reporting real estate trends in the US. Her work has been cited by CBS News, Curbed, The Los Angeles Times, and Forbes among others. With an academic background in journalism, Eliza has been covering real estate since 2012. Before joining PropertyShark, Eliza was an associate editor at Multi-Housing News and Commercial Property Executive. She has also contributed extensively to CommercialEdge. Reach her at [email protected]