When you take out a reverse mortgage, you convert the equity that you have built up in your home into an income stream. As with any mortgage, the lender secures the debt by placing a lien on your home. If you do not repay the debt then your lender can foreclose on the property although you can sometimes avoid foreclosure by entering into a deed in lieu of foreclosure agreement.
Federal and state agencies as well as non-profit organizations guarantee various types of reverse mortgages. You can also obtain these loans from private lenders if you are 62 or older. You cash out your equity and your lender provides you with monthly income payments that are designed to last for the duration of your life. Reverse mortgages are not repaid until the owner dies or no longer uses the financed property as a principal residence.
When you die, your home becomes an asset of your estate and your reverse mortgage becomes a liability of your estate. Upon death, your lender can demand full repayment of the loan and if the estate lacks the cash to pay off the debt, then your estate's executor should try to sell the property. If the executor cannot find a buyer, then the lender can foreclose. Likewise, if you stop using your financed home as your primary residence, your lender can demand immediate repayment of the reverse mortgage. Again, if you do not pay off the debt then the lender can foreclose.
Deed in Lieu
Foreclosure laws vary from state to state, but in many states the foreclosure process can last for months or even years. During the foreclosure process your lender has to contend with legal fees. Furthermore, if you fall behind on your property taxes then your lender cannot foreclose without first settling the back taxes. Some reverse mortgages are second lien loans which means your lender must payoff the first lien before selling the property. Your lender can avoid some of these expenses by entering into a deed in lieu of foreclosure agreement. This entails you signing over the deed for your home to your lender, and you and your lender avoid the foreclosure process.
If you surrender the deed to your home, your lender can sell the property to recoup the reverse mortgage balance. But foreclosure and deed in lieu sales do not always raise enough cash to settle the mortgage debt. Depending on your state's laws, your lender may have the right to sue you for the residual debt. Furthermore, when you surrender your deed, you renege on a debt agreement and a record of that debt default appears on your credit report for seven years. Credit reports do not matter to life estates so a deed in lieu arrangement may benefit all parties if the property owner dies. However, if you are still living, then a deed in lieu of foreclosure may cause you as much harm in terms of expense and credit score damage as a foreclosure.
- HUD.gov: Frequently Asked Questions About HUD's Reverse Mortgages
- HUD.gov: Deed-in-Lieu Frequently Asked Questions
- TampaBay.com: Reverse Mortgage Foreclosure Risk to Grow if Tax, Insurance Bills Go Unpaid
- Gold Country Homes: What to Do With a Reverse Mortgage When Last Surviving Spouse Dies?
- Federal Trade Commission: Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity