Bankruptcy

Reverse Mortgage Foreclosures

By Amy Loftsgordon, Attorney
Lenders sometimes advertise reverse mortgages to senior citizens as a foreclosure-proof way to get extra spending money to supplement their retirement income. Are these loans really that safe?

Some mortgage lenders and brokers tell elderly homeowners that it’s nearly impossible to lose a home to foreclosure with a reverse mortgage. But there are a number of events that can prompt a lender to call a reverse mortgage due. Once a triggering event happens and the lender calls due the loan, the borrower has only a few options (discussed below). Otherwise, the lender will foreclose.

Reverse Mortgages: The Basics

In a traditional mortgage, a borrower takes out a lump sum of money and repays the lender over a period of time, like 30 years, usually by making monthly payments. On the flip side, a reverse mortgage involves payments to, instead of from, a borrower. The lender sends the borrower periodic payments, which become the loan. The payments the borrower receives—along with accrued interest and fees— increase the loan balance and decrease the borrower’s equity in the home. (For more general information, see our overview of reverse mortgages.)

Triggering Events

With a reverse mortgage, the following triggering events that allow a lender to accelerate (call due) the loan:

  • The borrower permanently moves out of the home.
  • The borrower temporarily moves out of the home because of a physical or mental illness and is gone for over 12 consecutive months.
  • The borrower sells the home or transfers title (ownership) of the home to someone else.
  • The borrower dies.
  • The borrower doesn’t meet mortgage requirements like staying current on property taxes, having homeowners’ insurance on the property, and keeping the home in a reasonable condition.

Reverse mortgage lenders are known for accelerating loans after elderly homeowners commit rather minor mortgage violations. In one instance, a reverse mortgage lender called a loan due when a 90-year-old woman didn't pay the 27 cents needed to get paid up on her homeowners’ insurance.

Avoiding Foreclosure

After a lender accelerates a reverse mortgage loan, a borrower can avoid a foreclosure by:

  • repaying the full amount of the loan, including interest and fees
  • promptly fixing the problem, like getting current on homeowners’ insurance
  • selling the property for the lesser of the loan balance or 95% of the appraised value and repaying the lender with the proceeds, or
  • giving the home’s title to the lender.

But if the borrower doesn’t pick one of these options, the lender will probably foreclose and sell the home to recoup the loaned money.

No Deficiency Judgments

Sometimes, in situations involving regular mortgages, a foreclosure sale brings in less than the total amount the borrower owes on a mortgage. The difference between the total debt and the sale price is known as a deficiency balance. For example, suppose Mrs. Jones is going through a foreclosure and owes the lender $200,000. The lender eventually holds a foreclosure sale and sells the home for $150,000. After the lender applies the proceeds from the sale toward paying off Mrs. Jones’s debt, Mrs. Jones still owes the lender $50,000, which is the deficiency balance.

State law, the terms of the loan, and the circumstances sometimes allow lenders to sue borrowers for a deficiency judgment after a foreclosure sale when there is a deficiency balance. If the lender wins the suit, the borrower has to pay the amount of the deficiency balance to the lender. So, in Mrs. Jones’s situation, the lender might sue her for $50,000.

With a reverse mortgage, though, a lender can’t get a deficiency judgment after foreclosing.

Getting Help

To get general information about the pros and cons of reverse mortgages, visit the AARP website. If you’re thinking about taking out a reverse mortgage and worried about possible consequences down the line, consider talking to a financial planner or elder-law attorney first. If you’re concerned about a reverse mortgage foreclosure, consider talking to a foreclosure lawyer in your state.

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