A reverse mortgage can be an excellent tool for some older adults. It allows borrowing from the equity in one’s home to supplement one’s living needs, it requires no repayment until the homeowner either dies or moves out, and it limits the repayment obligation to the proceeds of the home sale (i.e., no personal repayment responsibility if sale proceeds are insufficient to retire the debt). If the owner moves out, he must notify the lender within two months. If the move is due to mental or physical illness, then the absence must generally extend to twelve months before a “default” occurs.
What can be done to avoid foreclosure after default?
The question is particularly important if there is equity in the home, or if some family member wants to live (or continue to live) there. Moreover, if the owner has died, a foreclosure will name the owner’s next-of-kin as parties to the action–not because they would owe anything, but because the lender wants to insure it will receive clear title. Many next-of-kin are concerned about appearing as a defendant in a lawsuit, even though there will be no judgment against them.
Reverse mortgages are heavily regulated by the U.S. Department of Housing & Urban Development (“HUD”), mainly because the loans are federally insured. If the owner dies, or no longer lives in the home, the lender has to follow specific steps. What follows is a paraphrasing of the HUD rules (the rules can be found in Sections 13-33 and 13-34 of HUD Handbook 4330.1 REV-5).
The lender must first ask HUD for permission to declare the loan due. If permission is given, then the lender must send a repayment notice to the borrower or to his estate. That notice describes the following options.
1. That the debt must be paid in full OR the property must be sold by the owner for the lesser of the debt, or 95% of the appraised value; OR good marketable title to the property must be deeded to the lender.
2. That the owner or the owner’s estate may request (and pay for) an appraisal, if an estimate of the property's current value is desired.
3. That, if neither of the above actions are taken in 30 days, foreclosure will be initiated by the lender in the next one to three months.
4. That, if applicable, the owner can remedy the default.
5. That the mortgage will be released and no deficiency judgment will be taken if the property has no other liens and is sold for at least 95% of the appraised value, with the net proceeds paid to the lender, even if the debt is greater than the appraised value.
If, within 30 days of the notice, the owner or the owner’s estate neither repays the loan, nor deeds the property to the lender, then HUD requires the lender to promptly begin foreclosure proceedings. The HUD Field Office may authorize the lender to delay the beginning of foreclosure proceedings longer than 3 months if a sale by the owner or his estate is in process. If the owner’s estate is making a reasonable effort to sell the property, these extensions will be granted in three-month increments up to a total of 12 months.
Thus, most importantly, avoiding foreclosure means acting promptly upon receipt of the HUD notice that declares the debt due. Whether that action is requesting a property appraisal, listing the house for sale, or deeding it back to the lender, depends upon the particular circumstances. As always, it may be useful to have legal counsel assist in evaluating the best course of action.