A mortgage is a type of security interest that serves as collateral for the repayment of a loan to buy a piece of property. A bank or other financial institution loans someone the money to pay for the property, and a mortgage is placed on the property to ensure that if the borrower defaults on the loan, the lender has the legal right to take possession of that property.
A reverse mortgage is an increasingly popular consumer loan for senior homeowners age 62+. It allows senior homeowners to tap into the home equity built up over the years while they lived in the house and it. With a reverse mortgage, the mortgage company pays the homeowner a monthly payment – the reverse of a standard mortgage. While making payments, the mortgage company gains a greater percentage of equity in the home. Thus, when the homeowner dies, the mortgage company will most likely own all of the home, so it will go to the lender.
Homeowners who obtain a reverse mortgage are not obligated to repay the money so long as they live in the home. The loan repayment is deferred until the homeowner dies, sells, or moves out of the home. There are no monthly mortgage payments, and homeowners can generally receive their home equity in monthly payments as tax-free cash.
It is important to note that homeowners are still responsible for paying property taxes, homeowner’s insurance, and home maintenance. If the property is subject to a homeowner’s association, the homeowner must also pay those dues.
Reverse mortgages are intended to give retired people on a fixed income monthly payments to cover their living 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
- Supplementing retirement income
For the homeowner to be eligible for a reverse mortgage, they must:
- Be at least 62 years of age. This 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 the home
- Have paid off all or the majority of their home’s original mortgage. This gives the homeowner a significant amount of equity in the home with which to borrow for the reverse mortgage.
What Are Reverse Mortgage Defaults?
Mortgage defaults on standard loans occur when the borrower fails to make their mortgage payments. Once a specified amount of time has passed since the borrower made their last payment, the mortgage loan may go into what’s known as default status.
When the loan falls into default status, the lender may then take action to repossess the property. Therefore, mortgage defaults risk the debtor’s property ownership unless or until action is taken to remedy the default status by paying off the due amounts.
With a reverse mortgage, the borrower does not make any payments, so logically, the borrower can’t fall behind in their payments and risk default. Nevertheless, a reverse mortgage loan can go into default. For example, reverse mortgage defaults can happen if the borrower fails to pay property expenses on the home.
An example is when the homeowner falls behind on their property taxes. This failure can cause the mortgage to default, which puts the owner in jeopardy of losing the house to foreclosure. Another example would be if the debtor fails to pay their homeowner’s insurance invoices.
Another 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 to remedy the cause of the default. However, many cases of mortgage defaults result in some considerably serious consequences. Some common examples of such consequences include:
- Foreclosure: Foreclosure is a legal process that forces the sale of a home to cover a debt. Foreclosure happens when a lender uses a legal process to force the sale of a property (like a home) to cover a loan. The property is sold at a public auction. Sales proceeds from the property go to the mortgage company to remedy missed payments. Note that 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 the borrower owns to compensate 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 of the sale or refinance
- Affected Credit Score: Most mortgage companies will notify the borrower’s credit company to inform them of the default. This situation could immediately and negatively impact the borrower’s credit score. This could later affect the borrower’s ability to secure future loans, lease housing, etc.
An immediate effect of reverse mortgage default is that the lender will halt issuing the monthly payments to the senior citizen borrower. This can cause significant financial problems, especially if the payments from the mortgage company are a large part of the homeowner’s income.
Finally, a reverse mortgage in default status can negatively affect the home’s title. This could be considered a “cloud” or defect on the title, effectively preventing or limiting the home from being sold.
What Else Should I Know About Reverse Mortgages?
Reverse mortgages can be an ideal solution for homeowners who are “house rich, but cash poor.” Reverse mortgages allow homeowners to remain in their homes and maintain financial stability. Reverse mortgages can also help reduce some of the financial strain associated with retirement or living on a fixed income as a senior citizen.
However, homeowners must be aware of the negatives associated with reverse mortgages. One such negative would be that reverse mortgages are often more expensive than traditional loans. These loans’ fees and interest are higher than other financial options. Furthermore, unlike a regular mortgage, with a reverse mortgage, the interest is not tax-deductible until the loan has been paid off.
Additionally, the loan balance increases over time, as do the interest and fees associated with the loan. This can cause the equity in the home to be fully or significantly depleted.
Another concern is that there have been many reported cases of lender abuse or reverse mortgage fraud. People seeking reverse mortgages should carefully check out all reviews of any company they consider using.
Do I Need an Attorney For Reverse Mortgage Defaults?
If you are in danger of defaulting on your reverse mortgage, consult 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 can also represent you in court, as needed.
