Using a Reverse Mortgage as a Legal Strategy to Prevent Foreclosure
One way to prevent a foreclosure is to use a reverse mortgage to pay off a traditional mortgage. However, defaulting on this type of mortgage also can lead to a foreclosure, so it is a risky strategy in most situations. The main example of a reverse mortgage is the Home Equity Conversion Mortgage program offered by the Federal Housing Administration.
A reverse mortgage is a loan that is based on the equity in the property. It involves paying the loan proceeds to the homeowner in monthly payments, a line of credit, or a combination. Less often, a reverse mortgage can be paid as a lump sum. The loan on the reverse mortgage becomes due and payable when the homeowner dies, moves out permanently, sells the home, or fails to keep up with taxes, insurance, or other requirements under the mortgage. To qualify for a reverse mortgage, the homeowner must be at least 62 years old. They also must own the home or have accumulated a large amount of equity. The home must be their principal residence.
Should You Use a Reverse Mortgage to Prevent a Foreclosure?
People who meet the requirements for a reverse mortgage may consider getting this type of mortgage to prevent a foreclosure. They can use the proceeds from the reverse mortgage to pay the debt on their current mortgage. This can allow an elderly person to stay in their home. Many people find a reverse mortgage attractive if they are struggling to keep up with payments after retirement on a subprime loan that has a high interest rate. It may be an option to consider if you cannot arrange an appropriate loan modification. However, there are certain drawbacks to using a reverse mortgage of which you should be aware.
For example, many elderly people depend on receiving Medicaid and other government benefits. Eligibility is based on the assets of the applicant or recipient, so receiving the proceeds of a reverse mortgage could raise your assets above the level of qualifying for these benefits.
An estate planning lawyer can help a homeowner understand how a reverse mortgage will affect the heirs of their estate.
Another reason to think twice about using a reverse mortgage is that you may want to leave the equity that you have accumulated in your home to your loved ones. You probably cannot do this if you use a reverse mortgage because it will consume most or all of the equity. You may want to talk to an estate planning or elder law attorney about the risks of taking this step.
Foreclosures Based on Reverse Mortgages
You still have certain obligations under a reverse mortgage. You will need to keep up with paying property taxes and insurance premiums on your home, and you will be responsible for costs associated with maintenance. If you live in a common interest development or a similar community, you will need to keep paying fees to the homeowner’s association. If you fail to keep up with any of these conditions because you cannot afford the related costs, the lender that provided the reverse mortgage can foreclose on the property. This has been an increasing trend in recent years.
Some Obligations Remain
A homeowner with a reverse mortgage will still be responsible for paying many other costs associated with owning a home, such as property taxes, and could face foreclosure if they cannot keep up.
A reverse mortgage also can fail if the homeowner moves out of the property for more than a year. Perhaps they need to care for a sick family member who lives in a different state, for example, or perhaps they need long-term medical treatment that is not available in their area. If this happens, the entire amount of the loan may become due because this is considered permanently moving out, even if the homeowner eventually returns to the property.