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Florida Reverse Mortgages May End In Foreclosure

The ads for reverse mortgages are enticing but Florida reverse mortgages may end in foreclosure causing elderly homeowners to lose their homes.

What is a Reverse Mortgage

A reverse mortgage is a loan that allows homeowners 62 and older who own their homes to convert the equity from their home into a lump sum payment, a monthly payment or a line of credit.

The intent of these mortgages was to help the aging population with declining income use the equity in their homes to pay their ongoing expenses.

The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM) is guaranteed by the Federal government and can only be issued through an FHA approved lender. There are also private reverse mortgage lenders as well.

Seniors are required to get counseling before taking out a reverse mortgage, however, the advertising many seniors receive about reverse mortgages can be deceiving. Some lenders advertise reverse mortgages as a ‘government benefit’ while others paint a picture of a carefree life in which you are never required to pay the money back. Neither of which is true. 

Why Reverse Mortgages Are Foreclosed On

A reverse mortgage is a loan. Seniors may not understand  impacts of such a loan even after the mandatory counseling they received. If their home is paid off, many think they are just ‘taking out the equity’ they built in their home.

Homeowners do not need to be approved for the loan and they are not required to pay off the loan as long as they remain living in the house. If, however, the borrowers should move or die, the loan becomes due.

How Florida Reverse Mortgages May End in Foreclosure

Many seniors opted to take out maximum possible in a reverse mortgage as a lump sum amount. Borrowers soon discovered the lump sum did not stretch as far as they hoped and suddenly found themselves without any money for ongoing expenses.

Even though seniors are automatically approved for a reverse mortgage, one thing they must do is is stay current on their property taxes and hazard insurance.

If your property taxes or hazard insurance lapse, the lender can foreclose on the home because you, the borrower, violated the terms of the loan. Upon violation of the terms, the entire loan becomes due in its entirety.

Borrowers may believe their loan has an escrow account to pay their insurance and taxes similar to the traditional mortgage used to purchase the home originally. There is no escrow account for a reverse mortgage.

The responsibility for the taxes and insurance fall to the homeowners in a reverse mortgage. If a senior cannot pay their taxes and insurance, it is not likely they could find the money to pay off the loan in its entirety.

When Does a Reverse Mortgage Come Due?

The reverse mortgage may come due when:

  • The last surviving borrower dies
  • The borrowers no longer live in the home
  • The home is sold
  • Taxes and insurance are not paid
  • The home falls into disrepair

If the loan comes due and the borrower is unable to pay the entire loan amount plus interest, the home is subject to foreclosure.

Risks of a Reverse Mortgage May Outweigh the Benefit

If both homeowners are not eligible for a reverse mortgage due to age, they may be advised to put only the older homeowner on the loan. This means that when the only borrower passes away, the entire loan comes due. Many survivors are in shock when they realize the reverse mortgage must be paid off or risk losing the home. Unfortunately, when the ‘trailing spouse’ or the heirs to the property cannot afford to pay off the reverse mortgage, the home is subject to foreclosure. 

If a spouse is not named as a borrower on the reverse mortgage, the loan will come due when their spouse dies. Heirs of this property with a reverse mortgage attached are learning they must come up with a large lump sum amount to payoff the reverse mortgage or risk losing their inheritance in order to settle the debt.

Eric Lanigan of Lanigan and Lanigan attorneys in Winter Park, Florida recognizes the need for seniors to seek legal advice before they consider a reverse mortgage on their home. Not all lenders are ethical so it is important that a senior borrower understand the complexity of a reverse mortgage and avoid the risk of foreclosure down the road. 

Reverse mortgages are complex loans. Unfortunately, there are unethical lenders who also try to push unnecessary products to seniors as part of the loan. These mortgages can also be expensive with higher than normal origination fees and interest rates. 

Following the ruling on Bennett v. Donovan, HUD changed how surviving spouses would be protected in future loans, however, existing loans may require the surviving spouse pay the loan off immediately or face eviction and foreclosure. There is a pending lawsuit (Plunkett v. Donovan), which further seeks protection for surviving spouses.

Scheduling a legal consultation is the best way to prevent seniors from falling prey to predatory reverse mortgage lenders and protect the borrower’s assets and his/her heirs in the event of the borrower’s death.

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