Can You Lose Your Home With a Reverse Mortgage?

A reverse mortgage allows homeowners to convert a portion of their home equity into cash. This financial product is designed for older adults who wish to access their home’s value without selling the property or taking on new monthly mortgage payments. Homeowners retain the title and ownership of their property. While a reverse mortgage should not lead to losing one’s home, certain borrower obligations must be met to prevent such an outcome.

How Reverse Mortgages Function

A reverse mortgage differs from a traditional mortgage because it does not require monthly principal and interest payments from the homeowner. The lender provides funds to the homeowner, which can be a lump sum, regular monthly payments, or a line of credit. The loan balance grows over time as interest and fees accrue.

Homeowners maintain ownership of their property. The loan becomes due and payable when certain conditions are met, such as the homeowner moving out permanently, selling the home, or passing away. This structure allows individuals to convert home equity into accessible funds while continuing to live in their residence.

Specific Events That Can Lead to Foreclosure

Homeowners must meet specific obligations to avoid default and potential foreclosure. Failure to adhere to these terms means the loan can become due and payable. The most common reasons for a reverse mortgage to enter foreclosure are tied to neglecting ongoing property responsibilities.

These obligations include:
Property Taxes: Timely payment of property taxes is required. Unpaid taxes can lead to a tax lien and foreclosure, making the reverse mortgage loan due.
Homeowner’s Insurance: Maintaining homeowner’s insurance is mandatory to protect the property. Failure to keep this insurance current can lead to default and foreclosure.
Property Maintenance: Homeowners are responsible for maintaining the property in good repair. Neglecting necessary maintenance can violate the loan agreement, as the property serves as collateral. The lender may initiate foreclosure if the property’s condition deteriorates significantly.
Primary Residence: The home must remain the borrower’s primary residence. If the homeowner moves out permanently, sells the home, or is absent for an extended period, the loan can become due.

The loan also becomes due upon the death of the last borrower or eligible non-borrowing spouse. If the heirs or estate do not repay the loan, sell the home, or refinance it, the lender can initiate foreclosure to recover the outstanding balance. Even with protections for non-borrowing spouses, their eligibility is contingent on meeting specific criteria and continuing to fulfill the loan’s terms.

Key Protections for Homeowners

Reverse mortgages include significant safeguards designed to protect homeowners. The homeowner always retains the title to their property; the lender places a lien on the property to secure the loan, but ownership remains with the borrower.

A crucial feature of federally insured reverse mortgages, such as Home Equity Conversion Mortgages (HECMs), is their non-recourse nature. This means neither the borrower nor their heirs will owe more than the home’s value at the time of sale or repayment. If the loan balance exceeds the home’s market value, Federal Housing Administration (FHA) mortgage insurance covers the shortfall. Heirs can choose to pay 95% of the appraised value to keep the home if the loan balance is higher than the home’s market value.

Mandatory counseling is required before obtaining a reverse mortgage. Prospective borrowers must undergo a counseling session with an independent, HUD-approved counselor. This counseling ensures that homeowners understand the terms, costs, benefits, and potential implications of a reverse mortgage, helping them make an informed decision.

Understanding Loan Maturity and Repayment

A reverse mortgage loan matures and becomes due when certain triggering events occur, rather than on a fixed date. These events include the death of the last surviving borrower or eligible non-borrowing spouse, the sale of the home, or the homeowner permanently moving out of the residence. The loan also matures if the borrower fails to meet ongoing obligations, such as paying property taxes, insurance, or maintaining the home.

When the loan matures, the borrower or their heirs have several options to repay the loan:
Sell the home, using the proceeds to satisfy the outstanding loan balance. If the sale price exceeds the loan amount, any remaining funds go to the heirs.
Refinance the reverse mortgage into a traditional mortgage, if heirs wish to keep the property.
Pay off the loan using other funds, such as savings or an inheritance.

In situations where the loan balance is higher than the home’s value, heirs have the option to purchase the home for 95% of its appraised value due to the non-recourse feature. If the loan is not repaid through one of these methods, the lender will proceed with foreclosure, but the non-recourse nature ensures that the estate will not owe more than the value of the home. Heirs usually have a period to decide on a repayment strategy after receiving notification that the loan is due.