What Happens When a Reverse Mortgage Loan is Upside Down?

I have posted on this topic before, and recently have had more questions and visits from seniors who are concerned about their reverse mortgage balances being higher than their home's current value.

I want to go into a bit of detail, but before I do here's the answer in a nutshell: 

As long as the borrower is living in the home, paying taxes and insurance and maintaing the home in good condition, there is nothing to worry about.  So please, do not lose any more sleep over this or don't let your loved ones lose any sleep.  All is well.

1. Is this a bad thing? 
2. Is the lender going to call the loan? 
3. What about my line of credit?
4. Can I sell my home? 
5. Will my children have to pay the difference when they inherit?

Here's the answers:

1.  It's never fun to owe more than your home is worth, but you should know that an FHA Insured reverse mortgage is a non recourse loan.  In fact all of the Jumbo Reverse Mortgages that I've ever dealt with are also "non-recourse" loans.  Non recourse means there is no "personal" liability for the borrower.  If the lender takes a loss on the loan, they cannot obtain a judgment or lien against the borrower.

2. As long as the senior homeowner occupies the home as their principal residence, pays insurance and taxes, and maintains the home in good condition the loan is not in default.

3. If you have an available balance in the line of credit for your reverse mortgage, it is available to you to withdraw.  Even if the home value has exceeded your loan balance!  That is not true for traditional HELOCs (nice feature for seniors, I wish they had it for me...)

4.  Yes, you can sell your home. Anytime.  But if it will be a short sale you will need to work with the lender.  They will want to have an appraisal so that you don't "dump" the house and the sale will need to be an arm's length transaction.

5. Nope, the kids are fine.  If you pass away with a reverse mortgage and the loan balance is higher than the value, your estate will need to payoff the loan.  If there is no equity left, or the home is "upside down" the estate will most likely allow the home to go into foreclosure (which takes a minimum of 6 months on a reverse) and the lender will then sell the home and any loss will wind up being a claim for the lender to FHA. 

Note- If the family inherits the home, and the loan is upside down, the family cannot purchase the home for the current value.  Just as it is in the regular mortgage world any short sales must be "arm's length" transactions.

I hope that I have alleviated some fears and if you know of a senior who is losing sleep over their reverse mortgage or worred about whether or not getting a reverse is the right thing to do.  Please direct them to my activerain blog or my linked outside blog, www.coronareverse.com where they can find links to lots of free and interesting information without any pressure.

 

 

Deborah Nance, Reverse Mortgage Professional for Corona, the Inland Empire and Southern Californa.