Reverse Mortgage and Foreclosure
Some of you may have heard stories about properties with reverse mortgages ending up in foreclosure. It’s true that some people who’ve taken out reverse mortgages have had their properties foreclosed upon. Below are some of the primary reasons why people find themselves in this position and what borrowers can do to protect themselves.
1. A surviving spouse (whose name is not on the mortgage) cannot afford to pay the loan balance.
A reverse mortgage becomes due and payable when all clients on the loan no longer live in the home. If only one spouse’s name is on the mortgage, and that spouse dies, the surviving spouse will have to either sell the home to pay off the loan, or may have to pay the balance themselves in order to stay in the home. If they cannot afford to pay off the mortgage balance, or if they cannot sell the home for an amount that will be enough to satisfy the debt, then the lender may put the home up for sale as a foreclosure. In order to avoid this type of reverse mortgage issue, borrowers may want to weigh having both spouses’ names appear on the mortgage.
2. The homeowner(s) fail to pay property taxes and insurance on the home.
Even though a reverse mortgage allows the homeowner to receive money without having to make monthly payments, the homeowners are still responsible for keeping their property taxes and insurance premiums up to date. If you fail to make these payments, your lender can call the mortgage due and if you cannot afford to pay back the balance, then your home may be foreclosed.
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3. The bank cannot sell the home for an amount large enough to pay the balance.
In some cases, homeowners with reverse mortgages pass away owing more on the loan than the home is worth. When this happens, if the homeowner’s heirs or estate cannot afford to pay off the loan balance, then the bank may take the deed to the property and sell it as a foreclosure.
To avoid this situation, it’s important to be realistic about your home’s value. You should also consider the following factors:
- How much are you borrowing?
- How much do you currently owe on your first mortgage?
- What is the interest rate?
For more information on avoiding foreclosure, speak with a licensed reverse mortgage counselor.