A reverse mortgage refers to a loan that is taken out by individuals over the age of 60. Essentially a reverse mortgage allows the borrower to access the equity in their homes. This equity is then converted into payments that the lender pays out to you.
The money received as part of the payment is usually tax-free. If you decide to take out a reverse loan, the title to your home stays in your name.
If you are considering taking out a reverse mortgage you may be wondering whether there is a risk of you losing your home. We have provided you with all of the answers in our guide below.
Many people believe that their home becomes the possession of a bank if they take out a reverse mortgage, however, this isn’t the case.
Because you retain ownership of your home as part of a reverse mortgage, if you meet the terms presented to you by the lender, there are very few ways that you can lose this ownership.
The following are situations that may cause you to lose your home as a result of a reverse mortgage.
If your home is not your primary residence, e.g you have sold it and moved, you will need to make the repayments on your mortgage. As such, you must make sure that the property in question is the one that you live in for the majority of the time and you are not away from it for longer than 6 months.
Moreover, if the current owner of the property dies and the remaining person is not listed as a borrower, there is a risk that the lender may request repayments.
Failure to keep up with your homeowner’s insurance provides another reason as to why you may lose your home.
Not only do you need to keep up with your homeowner’s insurance but you also need to stay on track with your property taxes, homeowners association fees, and other house-related expenses. This is because the lenders do not want to take on a lot of risks.
As part of the application process for a reverse mortgage, the prospective borrower will be assessed for their ability to cover any additional costs that they may have. Because of this, it is important to make sure that all payments are paid on time.
If you do not keep your home in good condition, you may lose it. This is because your home is classed as collateral. In certain circumstances, the home may need to be sold for the repayments to be made.
If you do not maintain the state of the property, it may decrease in value. Certain requirements need to be met, but if your house falls into a state of disrepair e.g the roofs are leaking, you may be forced out of your home.
As you can see, there are a few requirements that you need to meet as the homeowner. If you fail to adhere to these regulations and end up defaulting on your loan, a foreclosure may occur.
A foreclosure is a legal process that involves the lender and borrower. If there is a balance on the loan that is outstanding because the borrower has stopped making the payments, the lender will force a sale to cover the balance.
In the past, there have been instances where those over the age of 60 who are eligible for the loan have lost their homes, however, this doesn’t always happen straight away.
If the homeowner defaults on their payments it is likely that any future loan payments are going to be stopped.
The lender will usually provide the borrower with a timeline that schedules all of their upcoming payments. If there is an issue that causes the borrower to default on these payments, the lender can request for the loan to be repaid.
Although this may seem like a challenge for the borrower, they are options available to them. Some borrowers may choose to sign their property over to the lender so that it is no longer in their ownership.
Depending on the situation, some borrowers may be able to afford to fully repay the remaining balance of their loan.
After doing so, their home then belongs to them and they don’t have to worry about any pending payments. If the borrower is not able to raise the funds needed to cover the payments, they may choose to let the lender begin the foreclosure process.
Now you may be wondering what happens if the borrower/homeowner passes away. Whilst the rules and regulations may differ depending on the lender, we would advise you to consult the lender involved in your situation.
They will usually discuss the options that are available to you in regards to making the remaining payments on the estate. Normally, they will give you around 30 days to decide what you want to do.
If you decide that you want to pay off the remaining balance they will usually give you around 6 months to pay off the mortgage yourself or put the property up for sale and sell it.
This can differ depending on the program and provider that you go to for your mortgage. In most instances, you will be able to live in your home for 12 months consecutively before you need to start making your repayments.
As you can see, there is a risk that you may lose your home if you take out a reverse mortgage, however, this is only likely to occur if certain requirements are not met.
You must make sure that the property is your primary residence, that you keep up to date with the homeowner’s insurance and taxes and you keep your property in an acceptable state.