When a reverse mortgage borrower no longer meets their loan terms, one possible outcome is for the home to go into a reverse mortgage foreclosure. If the loan is a home equity conversion mortgage (HECM), foreclosure guidelines are set by the U.S. Department of Housing and Urban Development (HUD). The following explains why a HECM might go into foreclosure and HUD’s guidelines for what happens if it does.
Foreclosure in Reverse Mortgage
The term foreclosure is likely familiar to most borrowers. A foreclosure is the process of a lender taking possession of and selling a home to satisfy an outstanding loan balance. With a traditional mortgage, the lender may initiate foreclosure proceedings when a borrower fails to make monthly payments.
Though similar, foreclosure in a reverse mortgage is more nuanced because there are multiple triggers, or events, that might cause a property to go into foreclosure. If the borrower or their heirs cannot repay the loan and do not communicate with the servicer within a certain timeframe after it comes due, the lender can initiate foreclosure.
While foreclosure is a frightening term, the reality in a reverse mortgage is that because borrowers are never required to make monthly mortgage payments as a term of their loan, defaulting on the loan with a foreclosure outcome is less common than in a conventional mortgage.
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Reverse Mortgage Maturity Events and Foreclosure
In a reverse mortgage, certain maturity events will cause the lender to flag the loan as maturing or coming due. Some of these events are the natural conclusion of a loan. Natural maturity events include:
- The last surviving borrower passes away, and no surviving spouse is on the loan.
- The borrower sells or transfers the home.
- The borrower moves out of the home permanently.
- The borrower leaves home for more than 12 months.
If the last borrower on the loan passes away, the borrower’s heirs need to communicate with the servicer and decide how they will resolve the mortgage. Several options are available to them, but none involves the heirs taking on personal debt. When the borrower’s heirs or children cannot pay off the loan, fail to respond during the appropriate timeline, or are unwilling to provide a deed-in-lieu of foreclosure, the lender can initiate foreclosure proceedings.
If the borrower is still living and no longer living in the home, the loan balance must also be satisfied to avoid foreclosure.
Other events cause the loan to go into default which can result in foreclosure. These include:
- The borrower fails to maintain the home.
- The borrower doesn’t pay property taxes, home association dues, or property insurance.
How Does the HUD Foreclosure Process Work?
The oversight of HECMs falls under HUD, the agency primarily responsible for establishing rules and regulations for these loans. HUD sets the following guidelines for how the foreclosure process will proceed.
- Maturity event occurs. Once one of the above events occurs, the borrower is responsible for notifying the lender. The foreclosure process begins on the event date, not when the lender is notified. It is crucial that borrowers immediately inform the lender of the maturity event.
- Notification. Within 30 days of the event, a “Due and Payable Letter” is sent via mail to the property address. This letter is sent to the borrower who defaults or to the heirs or spouse of the borrower who has passed away.
- Borrowers or heirs must pay off the loan. The borrower who is in default or the heirs or the spouse of the last surviving borrower will have six months to pay off the loan from the date of the notification letter. The lender is required to send a pre-foreclosure notice during this time.
- First request for an extension. After six months and the borrower hasn’t established a repayment plan or sold the home, the borrower can request a 90-day extension. HUD must approve this extension.
- Second Request for an Extension. After nine months have passed and the borrower hasn’t established a repayment plan or sold the home, the borrower can request a second 90-day extension from the lender. HUD must also approve this extension.
- The lender will initiate foreclosure. The lender will initiate foreclosure proceedings at the 12-month mark from the triggering event and once all extensions have expired.
What are the Responsibilities of the Heirs Once a Foreclosure Occurs?
Once a foreclosure occurs, heirs are no longer responsible for the loan. Also, as a nonrecourse loan, heirs are not responsible for any loan balance that exceeds the home’s value. The Federal Housing Administration (FHA) mortgage insurance covers any deficits.
How to Avoid a Reverse Mortgage Foreclosure
There are several ways to avoid reverse mortgage foreclosure. Here are actions borrowers or borrower’s heirs could potentially take:
- Communicate with the servicer. Keep in constant contact with the servicer, especially if you want to request an extension or establish a repayment plan.
- Request a repayment plan. To help you avoid foreclosure, certain lenders will offer a repayment plan. This option is only available to borrowers. Heirs have the choice of either paying off the loan and keeping the home or selling the home, satisfying the loan balance and collecting any surplus after the sale.
- Repay the reverse mortgage loan with cash. If you have money or assets, you can apply those proceeds to repay the reverse mortgage balance and satisfy the loan balance.
- Sell the home. You can sell the home and use the proceeds to satisfy the loan balance.
- Offer a deed-in-lieu of foreclosure. If the heirs don’t want to take responsibility for paying off the loan balance, they can offer the deed to the lender instead of going through foreclosure.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. 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.
