Reverse Mortgage on Upside-Down Property
- What happens with a reverse mortgage when your home drops in value.
- Rights a lender has to collect on a reverse mortgage deficiency balance.
My reverse mortgage is on a home that is worth less than what I borrowed. Can the lender collect from me?
My father's home is in a reverse mortgage which he did the loan when the market was high. The reverse mtg was written for $280K. The house is now worth $130K. Are there options for modifying the reverse mtg or what is the best advise in this situation? And if there is no option to reduce the loan amount what will happen at the time it becomes due? Will the loan be called to be paid in full or what?
Thank you for your excellent question about your father's reverse mortgage.
Lender cannot alter the terms of a reverse mortgage
You and your father are rightly concerned about what the mortgage holder can do, when the value of the property that secured his reverse mortgage has fallen below the amount of money that was borrowed. The good news is that the bank cannot alter the terms of the loan. If the reverse mortgage calls for monthly payments to continue to your father, then he will continue to receive them, per the terms of the loan. Similarly, if the terms of the reverse mortgage gave your father a line of credit, the bank cannot reduce the size of that credit line.
Lender cannot collect on a deficiency balance
It was the bank that assumed the risk in the event that the house dropped in value. They cannot require your father to pay the difference between what is owed and what the house will sell for. The bank is also prohibited from filing a deficiency judgment against your father, if they cannot recoup all that they lent him. These protections were reasons that a reverse mortgage may have been a very good choice for your father, as the reverse mortgage provided him money to live on and also protects him in this kind of situation.
The not so good part is that the house is now worth far less than what is owed on it. This means that there is no asset to pass on to any heirs. The heir is not liable for any deficiency balance, but will not be able to reside in the house, after your father passes, without paying back all that is owed to the bank. When the loan comes due and there is not enough equity to make good on the balance owing, the bank is stuck with the loss. Again, if the sale of the house to a third party, at a fair-market price, does not cover the amount owed, the heir is not responsible for the remaining balance owed. The mortgage holder is left with that loss as a cost of doing business.
It is important for any heir to contact the loan servicing company and to discuss the situation. Generally, the heir will have a number of months to finalize a decision on what to do, but the time available to the heir can vary. Find out what timeline the lender expects. Stay in contact with the lender. Let the lender know if the plan is to sell, walk away, or refinance. It may be necessary to show some proof of the course of action being pursued, such as furnishing the lender with proof that the home is listed or that a loan application is in process, to assure that the lender understands the heir's plans.
It is generally not the lender's desire to foreclose on the home, but if the heir is non-communicative and the loan is not being paid back, foreclosure is the only option the lender is left with. If it moves to foreclosure, the foreclosure does not show on the heir's credit report.
Bills.com has written extensively about reverse mortgages. See the following Bills.com resources to learn more: Reverse Mortgage & Inheritance, Reverse Mortgage and Medicaid, Is a Reverse Mortgage a Good Choice?, Reverse Mortgage Living Trust, Reverse Mortgage Benefits, Reverse Mortgage Refinance,and the Bills.com reverse mortgage information page.
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