A mortgage is a type of security interest which is attached to a property, and serves as collateral for the repayment of a loan. This loan would be borrowed from a bank or other financial institution in order to pay for the property. A mortgage is placed on the property to ensure that if the borrower defaults on their loan, the lender has the legal right to take possession of that property.
A reverse mortgage is a specific type of loan available to senior citizens, for the purpose of assisting with their expenses. It allows those who are qualified to convert the equity in their home into cash, while retaining ownership of their home. The qualified homeowner receives money from the lender every month, as opposed to making monthly payments to their lender. A reverse mortgage is essentially a role reversal.
Homeowners who have obtained a reverse mortgage are not obligated to repay the money so long as they live in the home. In exchange, the lender retains some, most, or all of the home’s equity. When the home is either sold or vacated, the borrower must begin repaying the loan. It is important to note that the homeowner is still held responsible for other payments at this time, such as taxes and insurance. Additionally, if the property is subject to a homeowner’s association, the homeowner must also maintain their responsibility to pay those dues.
For the homeowner to be considered eligible for a reverse mortgage, they must:
- Be at least 62 years of age, although it is important to note that this generally applies to all individuals that are listed on the property’s deed of title;
- Own a home that is their primary residence;
- Have the reverse mortgage as the primary lien on said home; and
- Have paid off all or the majority of their home’s mortgage. This gives the homeowner a significant amount of equity in the home with which to borrow against once the reverse mortgage is effective.
Traditionally, this type of mortgage is intended for those who are retired and on a fixed income, in order to cover their living expenses. This is done by using equity from their homes, which is money that may be used to pay for any expenses. Common examples of reasons to obtain a reverse mortgage include:
- Covering the cost of medical treatments not covered by insurance;
- Purchasing long term care insurance;
- Financing home improvement projects; and
- Supplementing retirement income.
What Are Reverse Mortgage Defaults?
Mortgage defaults occur when the borrower fails to make one or more of their mortgage payments. Once a specified amount of time has passed, the mortgage loan may go into what’s known as default status. When a mortgage loan is considered to be in default status, the lender may then take action in order to repossess the property. As such, mortgage defaults risk the debtor’s ownership of the property, unless or until action is taken in an attempt to remedy the default status.
It is possible for a reverse mortgage loan to go into default. This remains true even if the borrower is not required to make monthly payments on the reverse mortgage loan. Reverse mortgage defaults can happen if the borrower fails to pay property expenses in order to keep the property current.
A common example of this would be where the homeowner fails to pay their property taxes. This failure can cause the mortgage to go into default, which in turn puts the owner in jeopardy of foreclosure. Another example of this would be if the debtor fails to pay on their homeowner’s insurance, which is another common issue especially among senior citizens who may not be able to properly manage their property accounts.
An unexpected reverse mortgage default can occur if the home is listed in the name of only one spouse, and that spouse dies suddenly. Such circumstances can place the surviving spouse in a difficult situation in terms of loan repayment.
What Are The Consequences Of Reverse Mortgage Defaults?
Depending on specific circumstances, the mortgage lender may be willing to work with the borrower in order to remedy the missed payments. However, many cases of mortgage defaults result in some considerably serious consequences. Some common examples of such consequences include, but may not be limited to:
- Foreclosure: Foreclosure is the sale process in which a property is sold at public auction. This is done in order to satisfy owed debts. Sales proceeds from the property go to the mortgage company in order to remedy lost payments. However, there is generally a grace period in which the borrower can make missed payments, even after the lender has initiated the foreclosure process;
- Other Property Liens: The lender may file a lien on any other properties that are owned by the borrower, in order to make up for the missed mortgage payments. If the borrower sells or refinances a property with a lien attached to it, the lender maintains the legal right to be paid out of the proceeds; and/or
- Affected Credit Score: Generally speaking, most mortgage companies will send a notice to the borrower’s credit company. This notice is to inform them of the default, and could immediately and negatively impact the borrower’s credit score. This could later on affect the borrower’s ability to secure future loans, lease housing, etc.
In terms of reverse mortgage defaults specifically, the main concern is the risk of foreclosure. Additionally, a reverse mortgage default is likely to be reported to the person’s creditors. Again, this can have negative effects on the debtor’s credit scores as well as their ability to borrow more money in the future.
An immediate effect of reverse mortgage default is that the lender will generally halt issuing the monthly payments to the senior citizen borrower. This can cause significant financial problems, especially if the homeowner or couple depends on those monthly payouts for their livelihood and wellbeing.
Finally, a reverse mortgage in default status can negatively affect the title of the home. This could be considered a “cloud” or defect on the title, which could effectively prevent or limit the home from being sold.
What Else Should I Know About Reverse Mortgage?
Reverse mortgages are considered to be an ideal solution for homeowners who are “house rich, but cash poor.” This is due to the fact that reverse mortgages allow the homeowner to remain in their home while also maintaining a sense of financial stability. Reverse mortgages can also help reduce some of the financial strain associated with being retired or living on a fixed income as a senior citizen.
However, it is imperative that homeowners are aware of the negatives associated with reverse mortgages. One such negative would be that reverse mortgages are often more expensive than traditional loans, and the interest attached is generally not deductible until the loan has been paid off whether in part or in full.
Additionally, the equity in the home may be fully or partially depleted by the reverse mortgage; this would leave the homeowner with little to no equity. Another area of concern is that there have been many reported cases of lender abuse or reverse mortgage fraud.
Do I Need an Attorney For Reverse Mortgage Defaults?
If you are in danger of defaulting on your reverse mortgage, you should consult with an experienced local mortgage lawyer immediately.
An experienced mortgage attorney can help you determine what your legal options are, and assist you in understanding what will happen next. Additionally, should the matter result in a lawsuit, an attorney will also be able to represent you in court, as needed.