When a loved one passes away leaving a house behind, the heirs left with the home may be surprised to find out there is a reverse mortgage lien on the property.
When Elizabeth Erickson’s mother passed away in 2012, she left a family home full of memories behind. The plan was to sell the home and split the proceeds between herself and her brother and sister. Unfortunately, the family found out through a title search that their mother had taken out a reverse mortgage on the home to supplement her retirement income. The heirs planned to repay the mortgage; however, it was too late, and the bank foreclosed on their childhood home.
A reverse mortgage is a solution for elderly homeowners to stay in their homes throughout their retirement, however it can be a risky solution, especially for heirs to the property.
Can a Reverse Mortgage Be Foreclosed?
For those who are elderly looking to supplement their retirement income, a reverse mortgage helps when the home is an asset, but the individual does not have a lot of cash coming in monthly. Equity in the home that has been built over the years can be borrowed against creating a draw for monthly income. The loan is then paid back with the borrower passes away, moves out of the home or violates the loan requirements.
Prior to the year 2015, qualifications for a reverse mortgage were simple. A homeowner 62 years or older could qualify as long as they had equity in their home. More recently, qualifications have changed and now a homeowner must go through a financial assessment to ensure the homeowner can pay their taxes, insurance and other homeownership related costs. Failure to pay means homeowners are at risk of foreclosure.
How Can I Avoid Reverse Mortgage Foreclosure?
As a person ages, small details are often forgotten. These details are essential in educating homeowners about reverse mortgages and the risks they can carry.
A reverse mortgage lender can:
Set a Lifetime Expectancy Set-Aside (LESA): The lender may require that money be set aside for taxes, insurance, homeowner’s association dues, or repair costs. This, the Lesa, is something the homeowner funds upfront with the closing of the loan.
Withholding of Funds: The lender can decide to withhold funds from the supplemented monthly income. For example, if the borrower receives $1,000 a month from the loan, but their monthly insurance is $200, then the lender will withhold the $200 insurance cost leaving the homeowner with only $800 every month.
The LESA amount that is set aside with the loan closing can vary and it is based on the life expectancy of the youngest borrower on the loan. If the borrower outlives that life expectancy the lender calculated, the LESA amount becomes insufficient to cover the initial obligation.
When the LESA runs out of funds, the borrower now takes on the responsibility of paying taxes and insurance each month. If those items are not paid, the lender is obligated to pay them on the borrower’s behalf since they have a secure lien on the property.
As these advances build up over time, the borrower can try to repay them through a payment plan with the lender, however, if the borrower cannot keep up with the repayment, the lender can start the process of foreclosure.
The LESA solution as a lender may call it, has proven to lessen the foreclosure rate on reverse mortgages over time, although it is not a perfect solution for homeowner’s in need of supplemented retirement income.
How Does the Foreclosure Process Work on a Reverse Mortgage?
When a homeowner defaults on payments, the lender will first send out a due and payable letter. The due and payable letter includes a breakdown of the current loan balance, layout of payment options to bring the loan current, the amount of time allotted for a response to the notice and a plan of how to avoid foreclosure. If the homeowner is still living, they may be able to pay and bring the loan to a current status. However, if the homeowner is trying to sell the home, or is now deceased, the heirs will have to figure out how to pay the debt back to avoid foreclosure proceedings.
If an owner or an heir would like to keep the property in their possession, they can pay off the debt or pay 95% of the appraised value of the house, or whichever dollar amount is less. When a homeowner or heir decides to the sell the property instead, but they cannot sell it for what is owed on the loan, the borrower nor their estate will be responsible for paying back the difference. With that being said, it is essential to know that if the loan balance is less than the market value of the home, the proceeds received will go to the homeowner or heirs. This is the ideal situation, of course.
When a homeowner decides not to sell and does not respond to the due and payable letter within 30 days, the loan servicer is able to begin the foreclosure process. This will eventually lead to the homeowner or any heirs losing any interest in the property they may have.
Reverse Mortgage Foreclosures
Depending on the state in which the property is located, the process of a foreclosure can vary. There are generally two types of reverse mortgage foreclosures.
Default on Taxes and Insurance
When a borrower stops paying real estate taxes or insurance on the house, the lender can evict the homeowner from the property as part of the foreclosure process.
When a home is secured by a reverse mortgage and the homeowner passes away, heirs are now responsible for the reverse mortgage. The heirs can decide to sell the home and pay the reverse mortgage back or they can pay 95% of the appraised value back to the lender as well, whichever is the less of the two. In some cases, heirs might decide to sign the property over to the lender through the process of a deed in lieu of foreclosure, or they may let it go into foreclosure and let the property go.
Both types of reverse mortgage foreclosures begin with a pre-foreclosure notice sent to the homeowner by mail. The lender is not opposed to resolving foreclosure issues with homeowner’s or their heirs.
In the case of Erickson, she tried hard to work with the foreclosing lender in order to keep her childhood home. She started with disputing the original appraisal done by the lender. Erickson worked with an attorney as well. She didn’t understand how her mother was able to obtain a reverse mortgage. Erickson’s plan was to buy the home and pay the money back to the lender.
However, the appraisal the lender provided came back with a value that was way out of range. The bank required a cash offer on the home as well. After time, the lender then told Erickson they were not interested in selling the property to her. Come to find out, the lender ended up selling the property taking a shortage of around $30,000 on the loan balance.
What if You Inherited a Property with a Reverse Mortgage in Foreclosure?
If you find out a property you inherited has a reverse mortgage attached to it, your very first step is to get in contact with the loan servicer. Foreclosure proceedings are sometimes the result of heirs not contacting the lender and keeping them informed on their intentions with the property.
Reverse mortgage servicers use tools to research and audit death records and keep themselves up to date on deaths of borrowers. If you have not notified the loan servicer, the lender is not aware of your intent and may take action.
If you receive a Due and Payable letter after you notify the servicer of a death, this is a typical practice and you have 30 days to respond. At this time, you can notify the servicer of your intent.
You will then have six months to either repay the debt or sell the property and repay the debt with the sale proceeds. The loan servicer will allow up to two 90-day extensions if you find you need more time, but you will need to stay in contact with the lender and keep them apprised of the progress.
If you decide to not keep the lender informed or respond to the lender’s correspondences and you let your time period expire, the loan servicer may pursue foreclosure.
It is essential to make a decision in regard to your inherited home that has a reverse mortgage attached. Whether you decide to keep the home, sell or walk away, keeping in contact with the lender and informing them of your intent may help keep the property out of foreclosure status.
When a homeowner who has a reverse mortgage passes away, foreclosure proceedings may begin quickly. However, this does not mean the bank finished foreclosure since there are options to bring the loan back to current or pay the debt off in full with the sale of the home.
If you are facing a reverse mortgage foreclosure proceeding, your best bet is to stay in contact with your loan servicer and work to resolve the situation. There are counselors the lender can connect you with who will help you find your best solution.