Reverse mortgages are available for borrowers at least 62 years old. Generally, homeowners own their homes free and clear of debt, but occasionally small mortgages exist on the property at the time the reverse mortgage is obtained. The loan is based upon the value of the home, not the credit of the homeowner. There are guidelines for a reverse mortgage by HUD, which insures the reverse mortgage loans. These loans are also non-recourse, which means the lender can only look to the property for payment. Some borrowers take the entire loan in the form of a lump sum, while others get monthly payments, and still others use the reverse mortgage as a line of credit.
If a borrower with a reverse mortgage files bankruptcy, the homeowner's experience can vary, depending upon how the homeowner took the loan. If any cash remains from the loan, it may or may not be exempt, depending upon the amount remaining. If the loan is taken in monthly payments, the lender might stop sending the payments until the Bankruptcy Court determines whether they can continue. If there is non-exempt equity in the home, the Court might not permit continued payments. In the same way, if the loan is taken as a line of credit, withdrawals from the line might cease until an order from the Court allows the withdrawals to continue.
Should a homeowner reaffirm a reverse mortgage? The answer is no - there is no personal liability for the reverse mortgage. Are reverse mortgage payments to a homeowner in the 6 months before filing considered "current monthly income" for purposes of the means test? The answer is again - no - because they are simply withdrawals from an asset, rather than earnings from work or a pension.
What can create a default under a reverse mortgage? If the homeowner fails to pay property taxes or insurance, those missed payments can constitute an event of default, which can result in a foreclosure. Of course, the death of the homeowner constitutes the maturity of the loan. The heirs of the homeowner must either pay off the loan or the lender will foreclose to collect the amount due it.
The heirs can use Chapter 13 to buy time to sell the property or otherwise pay off the reverse mortgage loan, with different options if the home is the heir's residence or not. If you are a homeowner with a reverse mortgage, whether inherited or not, and you are looking at options to address the reverse mortgage obligation, make an appointment with us.