Reverse Mortgage Foreclosure: Everything You Need To Know

A reverse mortgage can be a valuable financial tool that allows homeowners aged 62 and older to tap into their home equity and stay in their homes. While they don’t make traditional monthly mortgage payments, they still have expenses to cover, like property taxes. If you fall behind on property taxes or other home-related expenses, you can trigger a foreclosure on your property.

To avoid a reverse mortgage foreclosure, you’ll need to understand what a reverse mortgage is – including its potential benefits and risks – and know what can initiate foreclosure proceedings.

What Is A Reverse Mortgage Foreclosure?

A reverse mortgage is a loan based on the equity you have in your primary residence. It’s a loan option commonly used by retirees to help supplement their cost of living expenses and maintain their lifestyle.

You can still consider a reverse mortgage even if you’re still paying off your mortgage. A lender will typically use some of the funds from the reverse mortgage to satisfy the remaining mortgage amount.

Homeowners won’t have traditional monthly mortgage payments, although interest still accrues on the loan. But they’ll have homeownership expenses to cover – such as property taxes and homeowners insurance – and loan terms they must satisfy to avoid default.

A reverse mortgage foreclosure is triggered when an event outlined in the loan agreement occurs. The total loan amount, including accrued interest, is due and payable to the lender after a qualifying event, such as the death of the homeowner. Usually, the deceased’s estate or their heirs will be responsible for paying back the lender.

Types Of Reverse Mortgages

There are three types of reverse mortgages. Each type has specific reverse mortgage foreclosure conditions that can vary by location and income.

• Single-purpose reverse mortgage: This option is only available in some states and typically offered by governmental agencies and nonprofit organizations to low- to moderate-income borrowers. While single-purpose reverse mortgages are often less expensive, borrowers can only use funds from the loan for a specific purpose approved by a lender.
• Home equity conversion mortgage (HECM): The Federal Housing Administration (FHA) insures the HECM, which offers many loan protections for borrowers. Typically, FHA insurance helps prevent homeowners from owing more than their home is worth because it covers up to 85% of the home’s value.
• Proprietary reverse mortgage: Proprietary mortgages have no loan limits. In 2022, the maximum loan amount a borrower could receive on a reverse mortgage was based on a home value of $970,800 – even if their home is worth more. The FHA doesn’t insure proprietary mortgages, and they typically have higher interest rates than HECM loans. Most lenders only pay out a lump sum. This option is ideal for homeowners who expect their homes to appraise well over the HECM limit.

While Rocket Mortgage^® doesn’t currently offer reverse mortgages, borrowers can apply for a cash-out refinance, an alternative option to withdraw money from their homes.

Causes Of A Reverse Mortgage Foreclosure

Several events outlined in your loan agreement can initiate a reverse mortgage foreclosure – and only one of them needs to happen to initiate foreclosure. Here are common events that can trigger a reverse mortgage foreclosure:

• The borrower dies, and their spouse isn’t on the loan.
• The property is sold, or the title is transferred.
• The borrower doesn’t use the home as their primary residence.
• The borrower hasn’t lived in the home for over 12 consecutive months.
• The borrower missed property taxes or homeowners insurance payments.
• The borrower isn’t performing home maintenance.

Carefully read through your reverse mortgage loan agreement to know which events can trigger a foreclosure.

Reverse Mortgage Foreclosure Timeline

A qualifying event will set the wheels in motion and initiate the reverse mortgage foreclosure process. Because the most common reverse mortgages are HECM loans, we’ll run through the timeline for a HECM foreclosure.

The foreclosure timeline begins on the date of the triggering event – not the date the lender or servicer becomes aware of it. To avoid a potential reverse mortgage foreclosure, notify the lender about any qualifying event as soon as possible.

• Within 30 days of the qualifying event, a lender will mail a “Due and Payable” letter to the surviving spouse or heirs, granting them 6 months to repay the loan amount or sell the home to pay off the loan.
• The lender or loan servicer may be required to send a preforeclosure notice within 6 months.
• If the loan isn’t repaid within 6 months, the surviving spouse or heir has at least two chances to request a 3-month extension from the Department of Housing and Urban Development (HUD). The requests are subject to HUD’s approval. To improve the likelihood of approval, the surviving spouse or heirs must submit proof of their continuing efforts to refinance the mortgage or sell the property. Single-purpose reverse mortgages and proprietary reverse mortgages may not offer extensions.
• If the debt remains unpaid, the lender or loan servicer can foreclose on the house. The foreclosure timeline will depend on state law.

Staying in constant communication with your loan service provider will help you better navigate the process regardless of the reverse mortgage you have.

How To Avoid Reverse Mortgage Foreclosure

• You can retain ownership of the home by refinancing to a traditional mortgage. Rocket Mortgage offers conventional mortgages to help individuals and families facing reverse mortgage foreclosure. We also offer financing options, such as a cash-out refinance, to help homeowners afford expenses.
• To increase your chances of delaying a reverse mortgage foreclosure, especially if you need to apply for extensions, communicate early and often with your loan service provider.
• If your loan service provider offers a repayment plan, see if you qualify.
• Consider consulting with a HUD counselor. They provide foreclosure prevention advice for free.
• Consider selling the home and using the sale proceeds to pay off the reverse mortgage loan.
• If you have the funds available, you can pay off the debt with cash, keep the property and get rid of the reverse mortgage loan.

Foreclosure Protections For Reverse Mortgage Borrowers

HECMs have safeguards to help reduce the financial risks of a reverse mortgage. Before obtaining a mortgage, borrowers must attend a 90-minute counseling session approved by HUD. During the session, borrowers will learn about the mortgage’s benefits and potential risks and explore other financing options and strategies.

Extensions

With a HECM, eligible homeowners, surviving spouses or heirs can request two 3-month extensions during foreclosure. HUD provides final authorization on any extension request.

Deed In Lieu Of Foreclosure

Homeowners, surviving spouses or heirs can stop a reverse mortgage foreclosure by voluntarily returning the deed to the loan service provider.

Qualified Non-Borrowing Spouse

A surviving spouse who’s not on the reverse mortgage or title may qualify as a non-borrowing spouse. An eligible non-borrowing spouse must meet five criteria to qualify:

1. You’re behind on property tax and homeowners insurance payments.
2. You maintain the property according to the conditions of the HECM loan.
3. You were lawfully married to the homeowner.
4. The home was your primary residence while the HECM was in effect.
5. You can legally hold the title to the home within 90 days of your spouse’s death.

Reverse Mortgage Foreclosure Risks

While HECMs offer some risk reduction for borrowers, other reverse mortgage options may carry higher risks to borrowers or their heirs. For example, if a surviving spouse or heir inherits the responsibilities of a mortgage upon a borrower’s death, it may impose a financial burden that can lead to foreclosure.

Additionally, in the case of a living borrower who experiences a reverse mortgage foreclosure, the lender may implement a deficiency judgment against you if the sale of your former property does not satisfy your debt.

The Bottom Line

Reverse mortgages allow homeowners aged 62 and older to tap into their home equity and supplement their expenses and lifestyles. But a triggering foreclosure event – like moving or failing to pay property taxes – can turn this valuable financial tool into a financial burden for you, a surviving spouse, or your heirs. Work with your lender or loan servicer to prevent foreclosure.

If you’re exploring property finance options, learn more about a cash-out refinance with Rocket Mortgage.