Walking Away from Reverse Mortgage

Walking Away from Reverse Mortgage

Pros and Cons of Walking Away From Home with a Reverse Mortgage

My mom has a reverse mortgage via World Alliance Financial. My mom is getting older and unable to manage the home by herself. What is the penalty, if she walks away?

IN THIS ARTICLE:
  • World Alliance Financial was a major player in the reverse mortgage market.
  • FHA HECM reverse mortgages are non-recourse loans.
  • Consider the downside of leaving a house that requires no monthly mortgage or rent payment.

Thank you for your question about your mom’s reverse mortgage with World Alliance Financial and what consequences she faces if she chooses to walk away from the home.

World Alliance Financial

Your mom took out her reverse mortgage with World Alliance Financial. At one time, World Alliance Financial as one of the major players in the reverse mortgage industry, having funded over $4 billion in reverse mortgages.

Don't Make a Hasty Decision

Call 800-998-7497 to speak with a Money Coach. Discuss the impact of walking away from the mortgage and how you will pay for your future housing costs.

Anyone watching TV a few years ago (who did not flip channels as soon as a commercial came on) likely saw the famous actor Robert Wagner advertising World Alliance Financial’s reverse mortgage product, under the name the Senior Lending Network. Wagner touted a World Alliance Financial reverse mortgage as a way for seniors with equity in their home to enjoy life and improve their financial security.

In 2009 World Alliance Financial stopped taking reverse mortgage applications. However the fact that they are no longer functioning as a reverse mortgage originator does not affect any existing borrowers. Her situation would be the same if she had taken out a reverse mortgage from any of the other major reverse mortgage providers in the industry, such as Quicken’s One Reverse or American Advisor’s Group (AAG).

What Happens When You Walk Away from Reverse Mortgage

You did not mention whether your mom has any equity in her home. I assume that because she is considering walking away from the home that she could not sell it for more than the balance on her reverse mortgage. If she does have equity, she certainly should sell the home and pocket the difference between the sale price and what she owes.

HECM

It is likely that the reverse mortgage your mom took out was an FHA HECM reverse mortgage. An HECM is the most common type of reverse mortgage. With an HECM a borrower cannot be held responsible for any difference between the home’s sale price and the balance she owes on the reverse mortgage, called a deficiency balance.

Non-recourse

HECM reverse mortgages are non-recourse loans. If a borrower has a HECM reverse mortgage, then the lender cannot pursue the borrower for any deficiency balance. The only recourse the lender has is to sell the property and keep the proceeds. No matter how large the deficiency balance, it is the lender that is on the hook for any drop in the property’s value, if the borrower walks away from the reverse mortgage.

Drawbacks to Walking Away from Reverse Mortgage

Before you mom walks away, however, she should consider all of the possible consequences. Her reverse mortgage gives her the protection of staying in the home for the rest of her life, as long as she maintains the property and pays the property taxes. If it would be cheaper for her to pay for the upkeep on the home than it would cost her to live elsewhere, that is a strong reason to stay put.

Your mom should also consider whether she wants you or anyone else to inherit the property. If she were to pass away, you or any heir would likely have to get a loan to pay her reverse mortgage lender and stay in the home. However federal law makes it so that you or any heir that wants to own the property must pay either the mortgage balance or 95% of the appraised value of the mortgaged property, whichever is less. If property values have fallen in her area, but are expected to rise, buying a home for 95% of its appraised value is a good deal.

Recommendation

Your mom can probably walk away from her home without any financial responsibility, even if her home is worth less than the balance on the reverse mortgage. Leaving the home and no longer needing to maintain the property may be very appealing to her, but she should proceed carefully, after weighing all the pluses and minuses.

She should:

  • Verify her World Alliance Financial reverse mortgage loan is a non-recourse loan, which it likely is.
  • Consider how important it is for one of her heirs to have a chance to keep the property
  • Compare her future housing costs to what it would cost her to pay for upkeep and property taxes on her home. It could be cheaper to stay than move.

A lifetime of housing at no cost other than upkeep and property taxes should not be given up lightly.

Can I Qualify for a Reverse Mortgage?

Contact one of Bills.com's reverse mortgage providers for a no obligation, no-hassle reverse mortgage quote.

15 Comments

JJeffery Pflum, Mar, 2021

I have quite a strange problem with the situtation on my mother's home that I'm trying to process in a deed in lieu with the lender Novad. I was well aquainted with their record on the BBB web site so I was ready for a slow ride. My mother was injured at her home Jan 14 2020, and needed a hospital stay for head injury. After she was diagnosised with diamentia and has been admitted to long term memory care for good, she's 93. I alerted Novad and HUD in a letter requesting a deed in lieu. Novad appointed a specialist to handle my account and told me to empty the house and she can start the process. I did and got her the POA documents and dr. note testifing to her needing me to make her decisions. This was done by Feb 1. I sent two emails about the progress and finaly got a answer that she would pass it along. My question is this, the insurance after a inspection sent me a notice to discontinue the policy in late nov. I didnt see it until almost new years in her mail, it expires in 2 days. i donlt want to buy any short term ins. if their going to drag out the process. Since I started the deed in lieu can I just say its the lenders reponability since they will be taking over as soon as they take posession? No insurance wants to take on a short term policy.

JJoshua Abreu-Rosa, Aug, 2021

Hello Jeffery. 

Thank you for reaching out regarding your situation. Please, do not take my answer to be legal advice as I am not an attorney. Only attorneys can offer legal advice. 

I am curious is there still a mortgage on the home? If so, you may be required by law to have insurance. This could limit your options and require you to make arrangements.

My concern is why the insurance cancels the policy. Sometimes it's caused by the poor condition of the home. If that is the case, that may affect the close of the Deed in Lieu. 

Reach out to the lender to see if they have any options to cover the home in the meantime.

Regards, Josh 

HHelen, Dec, 2020

My mother is law is moving into a nursing home. She has a house with her sister who is deceased. There is a reverse mortgage on the house which was held jointly. If she turns in the house to the bank is there income tax on loan forgiveness? (value of house is less then mortgage)

BBetsalel Cohen, Dec, 2020

For any legal or tax advice regarding your specific case, please consult with a certified expert. The exact circumstances will depend on the type of reverse mortgage you have. 

The bank is covered by insurance to cover the difference between the mortgage balance (lump sum payments, monthly payments, and accrued interest) and the property's market value. Therefore, in general, mortgage forgiveness should not be an issue.

BBud, Oct, 2020

My father passed away two weeks ago, after spending 6 months in and out of hospitals/nursing homes. My mother is unable to maintain their home by herself (she is 85, frail, and battling cancer). The house is not a safe environment (too many stairs, etc. for laundry, etc). They have a reverse mortgage where the balance is significantly higher than the house, so there is not equity. The house is old and hasn't been updated in years. It definitely needs work. She is moving into an adult living community next week, and I am headed north to help her with the move, close the house and tell the holder of the reverse mortgage that the property will be vacated within two weeks. Do they have any recourse when we know there are no assets left in the house? Once we give them a date, we would notify all utilities, that we no longer have the property, do we give them the reverse mortgage holders contact info? Any danger in cancelling the homeowners insurance once we've told the mortgage company our evacuation date? Anything I haven't thought about?

DDaniel Cohen, Oct, 2020

Bud, please accept my condolences on your family's loss.

Because I am not a lawyer, the information I share is not to be taken as legal advice.

It sounds like you are covering all bases properly. I think you should contact the home insurance provider and let them know your plans, but not cancel the insurance or cut the utilities until you know you don't have to go back to the house. There should be liability beyond the property itself.

You can contact the lender right away, too. You will have time to move your mom and the lender is not going to cause you problems. In fact, they may have some helpful advice and be able to guide you in the steps that benefit you and them, too.

JJudy Williams, Jan, 2020

It’s a shaft to get people’s homes .I had two strokes was in money trouble they came and appraised my house higher than it is then didn’t tell me they tack on mortgage insurance every month they lied to me .Im going to go to every paper I can as soon as I get with a lawyer

DDaniel Cohen, Jan, 2020

Consulting with a lawyer is a good idea, from what you described. You can also contact the CFPB and your state's Attorney General.

LLinda Smitnick, Jul, 2019

I need to get section 8 senior housing but I have a home with a reverse mtg that I want to turn in. How can I get the section8, my home is just too expensive?

DDaniel Cohen, Jul, 2019

When you have a reverse mortgage, you are responsible only for maintenance and taxes. If you determine that it will cost you less to rent somewhere than to pay property taxes and upkeep on the property, then it makes sense to pursue other housing. If rent will exceed the housing costs, moving doesn't make sense, as the reverse mortgage gives you the legal right to stay in the home the rest of your life. If costs to rent are greater than your current costs, you may need to look at an alternative, such as renting out a room in your home.

If you decide to vacacte the home and there is equity in the home, you can sell it and pay off the reverse mortgage lender and keep the rest of the money. If you owe more than the home is worth, you can leave whenever you wish, informing the reverse mortgage holder of your plans to vacate.

To get Section 8 housing , you must apply and meet the low-income and other qualifying criteria. There is a waiting list in most areas of the country, to my knowledge. Here is a link to information about Section 8, at the government site.