Foreclosure Of Reverse Mortgages Lending Guidelines
This BLOG On Foreclosure Of Reverse Mortgages Lending Guidelines Was PUBLISHED On June 29th, 2019
Reverse mortgages are mortgage loans for seniors:
- Reverse Mortgages are home loans when a lender will lend on a home for homeowners who are at least 62 years old where the homeowner has equity in their homes
- The older a borrower is, the more loan to value the lender will lend on
- For example, if a homeowner is 62 years old, the loan to value may be 50%
- Whereas if the homeowner is 75 years old, the loan to value may be 70% loan to value (Please not these loan to value are not accurate figures and are used just for illustration purposes only)
- The purpose of a reverse mortgage is for a homeowner not to make a housing payment
- This only holds true as long as they stay and live in the home and as well as the borrower is able to make the property tax and homeowners insurance payments
- With reverse mortgages, the balance of the loan will keep on going up
- If the homeowner lives to be over 100 years old, they still do not have to make a mortgage payment
Traditional Mortgage Loans
Traditional mortgage loans are home loans where borrowers need to qualify for a mortgage where the lender needs to review credit history, credit scores, income, job history, assets, and liabilities.
- Traditional mortgage loans are for home buyers purchasing a home or homeowners refinancing their current home loan for better mortgage rates and terms
- After the borrower closes on his or her traditional mortgage loan, the borrower then is required to make the principal and interest payments on their mortgage loan until their mortgage loan term is up
- Or until they decide to pay off the balance of their loan
If the borrower does not make their scheduled monthly payments, the lender can start foreclosure proceeding and can foreclose on their home loan.
With reverse mortgages, the term of the loan is different.
- Reverse mortgages are only for homeowners who are at least 62 years old and who have equity in their homes
- Seniors older than 62 years old who own their homes but do not have equity in their homes will not qualify for reverse mortgages
- Seniors with equity in their homes can convert that equity to income or a line of credit
Reverse mortgages are for homeowners who intend to occupy their homes as their primary home.
Federal Housing Administration
The Federal Housing Administration, FHA, insures all reverse mortgages in the United States through their Home Equity Conversion Mortgage loan program, also referred to as HECM.
- Reverse mortgage lenders are insured for all reverse mortgages they originate and fund by the Federal Housing Administration in the event of loss occurred
- This holds true as long as they follow FHA lending guidelines on reverse mortgages
Lenders are also guaranteed by FHA that they will be repaid in full in the event the home is sold.
Difference Between Reverse Versus Traditional Mortgages
The difference between reverse and traditional mortgages are that reverse mortgages don’t require homeowners to make their monthly mortgage payments to their mortgage lender as long as they are alive and occupying the home. With reverse mortgages, the loan proceeds are paid to the homeowner at the time of their refinance. The borrower has several payout plans to choose from.
- Monthly payment plan where the reverse mortgage loan borrower gets a monthly payment instead of a one lump sum
- A line of credit, or
- Lump sum (with a HECM, you are limited to 60% of the loan amount during the first year after closing in most cases)
Reverse mortgage loan borrowers can also elect to get a combination of monthly installments and a line of credit.
Proceeds from reverse mortgages are tax-free and the borrower can use it anyway they want. They can use it for remodeling their homes, purchase a new vehicle, pay down debts, or take a vacation.
When Is The Term Up On Reverse Mortgages?
There is no term limit on paying off the balance of the reverse mortgage as long as the borrowers are alive. Reverse mortgages are due if the following occurs:
- If the borrower or borrowers die, the estate needs to repay the loan and keep the property (generally, with a HECM, the heirs may pay the lesser of the balance or 95% of the current appraised value of the home)
- If the borrowers decide to sell the property, they need to pay the reverse mortgage lender before they get any leftover proceeds
- The borrower decides to deed the property to the lender
- In the event, the borrowers abandon the property and let the lender foreclose
What If Reverse Mortgage Borrower Wants To Sell Property?
A homeowner does not need permission to sell the property.
- If the homeowner decides to sell the property or if the property is transferred to someone else, the reverse mortgage is due and needs to be paid
- In the event, if the homeowner decides to sell the home, the title company will take the proceeds from the home buyer
- They will pay off the lien on the mortgage as well as other liens attached to the property and closing costs of the seller
The leftover proceeds from the sale will go to the borrower.
What Happens If The Borrower No Longer Lives In The Home?
In the event, if the borrower no longer occupies the residence, and moves out permanently such as a nursing home or a family member’s home because he or she can no longer take care of themselves for longer than 12 months and the move is permanent, the loan balance is due and needs to be paid off.
What Happens If The Borrower Cannot Meet Terms Of The Reverse Mortgage?
A borrower needs to meet the terms and conditions of the reverse mortgage loan.
- Some of the terms and conditions of the reverse mortgage will include being an owner occupant, have adequate homeowners insurance, and pay the property taxes as well as maintain the property in satisfactory condition
- If the borrower does not meet the above conditions and the property is in disrepair, the borrower is in default on the terms and conditions of the loan and the mortgage is due and needs to be paid off
The lender will work with the borrower in curing and getting the reverse mortgage back in compliance and give the borrower some time.
Foreclosure Of Reverse Mortgages When Loan Is Due
Foreclosure Of Reverse Mortgages When Homeowners Are Not In Compliance:
If the borrower cannot come to compliance and still violates the terms and conditions of the mortgage, the reverse mortgage will come due:
- It needs to be paid off or the homeowner will face foreclosure
- Or can deed the property to the lender
- When the lender forecloses on the home of the borrower, the balance of the mortgage may exceed the value of the property
- The negative balance is called a deficiency
- With reverse mortgages, a deficiency judgment is not allowed so all the borrower needs to do is sign off on the deed to the property to the lender in the event they have no equity and not be liable
For more information on the contents of this article on Foreclosure Of Reverse Mortgages or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at [email protected]