Can You Default on a Reverse Mortgage?

By Steven Roberts Updated on 7/27/2017

A reverse mortgage is a non-recourse loan program insured by the FHA that allows homeowners over the age of 62 to receive funds from the equity in their home.  This type of loan lets homeowners still live in the home until they either pass away or no longer live in the home as a primary residence. 

Heralded by lenders as totally safe and risk-free, reverse mortgage borrowers are assured of never owning more on the loan than their home is worth, regardless of how much has been borrowed. 

However, it is still completely possible to default on your reverse mortgage.

How is it possible to default on a reverse mortgage?

While there are no monthly payments to the lender required on a reverse mortgages, borrowers are still responsible for the maintenance of their home, for keeping current on their homeowners insurance premiums, and for paying their property taxes. 

The reverse mortgage does not come due until the youngest remaining borrower either dies or moves out of the home permanently or when the borrowers chooses to repay the loan early.

Yet if the terms of the loan are not being met, such as the payment of property taxes, the borrower will find himself in violation of the mortgage giving the lender the right to terminate the reverse mortgage. 

This is due to the fact that with HECMs, a tax lien takes precedence over the reverse mortgage lien. Therefore the government takes priority over the lender for the collection of debts when the home is being sold.

Many reverse mortgages borrowers are defaulting on their loans; in fact, the most recent figures show that 8% of the total number of borrowers (some 30,000 people) have defaulted. Mainly this is the case because borrowers have not paid their property taxes. 

Many borrowers choose to receive their reverse mortgage money in one lump sum and then fail to set aside adequate funds for such expenses. Or they may find themselves in some financial bind after having received the funds. The makers of reverse mortgage policy never anticipated this being an issue. 

Consequences of Reverse Mortgage Default

If you default on your reverse mortgage, the first thing that will happen is the lender will cancel your equity line of credit or, if you chose to receive your funds in term or tenure payments, the payments will cease immediately. 

You will be given a chance to rectify your financial situation, usually a year. The lender may then apply for foreclosure on your home with the local court system. If approved by the court, the property will be sold. 

After the reverse mortgage is paid off and any unpaid taxes, insurance fees, or any maintenance costs are taken care of, the remaining proceeds from the sale will go to the borrower. If this happens, the borrower's credit will be in shambles, making it extremely difficult to procure another loan.

In 2010, when the FHA was encouraging lenders to request foreclosure on properties with reverse mortgages in default, the agency itself was experiencing a financial crisis with rumors of a bailout from the federal government. 

Most lenders even at the time were loathed to pursue this course of action due to the bad press associated with foreclosing homes. The Department of Housing and Urban Development (HUD) has now released new guidelines for HECMs to deal with the problem of default. 

Potential reverse mortgage borrowers should not let stories of defaults scare them, as the new policies are designed specifically to prevent further high numbers of defaults.

Foreclosing on a Reverse Mortgage

While lenders will take all measures to avoid foreclosing on a reverse mortgage, they may not have any other options with regards to borrowers who cannot correct the deficiency by either repaying the outstanding debt or making sufficient home repairs. 

If foreclosure approval is granted, the property will be sold to cover the missed insurance or tax payments. Any remaining funds from the sale will be disbursed to the borrower once the reverse mortgage balance has been paid off. 

However, borrowers who undergo foreclosure will take a severe hit to their credit scores and cannot often obtain new mortgage loans.