Reverse mortgages are a financial instrument that is becoming more popular as the Baby Boomers age. With a regular mortgage, the home buyer borrows money from a financial institution to purchase a property. The financial institution owns the money that bought the house and receives the money back in the form of mortgage payments. As the home buyer makes the payments, their equity in the home goes up as the balance owed goes down.
With a reverse mortgage, a homeowner goes to a financial institution and borrows money against the equity in the home. As the homeowner uses the money, their equity in the home goes down. It’s similar to a HELOC or home equity loan, but not the same thing at all. First, the borrower must be 62 or older and have substantial equity in the home by way of a largely or completely paid off mortgage. The financial institution then gives the homeowner a lump sum, a line of credit, or makes monthly payments to the homeowner to supplement their retirement income.
Another difference from a regular mortgage is that instead of paying interest and fees each month, these are added to your loan balance. As the loan balance grows, the homeowner’s equity shrinks. Once the homeowner no longer lives in the house, the loan must be paid back in full. But on the bright side, the borrower will not pay more than the current value of the home.
There are some other key differences in reverse mortgages that can trip borrowers who are unfamiliar with them. For one, the homeowner does not have the ongoing duty of making monthly mortgage payments. In fact, the entire loan balance, which includes interest, becomes due upon the borrower’s death, permanent move, or sale of the home. However, the borrower does have some ongoing duties if they want to avoid losing the home to foreclosure.
Unlike most regular mortgages, most reverse mortgages do not escrow any funds for either property taxes or homeowner’s insurance the way that is typically done with regular mortgages. This means that the borrower is responsible for paying property taxes and homeowner’s insurance, in addition to maintaining the property. If the borrower doesn’t meet the loan requirements of carrying homeowner’s insurance and paying property taxes, then the lender could seek a foreclosure action and the borrower could lose the home.
The answer is “maybe.”
If you are currently in a Chapter 13 bankruptcy and want to apply for a reverse mortgage, you will have to discuss these matters with an experienced bankruptcy attorney as well as with the financial institution since bankruptcy court approval will be necessary.
If you have a reverse mortgage but you are still determining whether a Chapter 13 bankruptcy is a good option for you, here is a brief list of things you may want to consider:
Also, it might be better to wait to file for bankruptcy after you have less non-exempt equity. This might imply having to wait some time after the reverse mortgage loan balance eats away any remaining equity in the home. This should be decided in consultation with your bankruptcy attorney as it will affect your case.
Some reverse mortgage contracts include provisions that determine the status of the loan upon the filing of a bankruptcy petition. Some contracts may include default or acceleration clauses, or both. Meaning that the bankruptcy filing would trigger a default on the loan, making it due and payable immediately and/or accelerate the due date of the loan’s full repayment. So, for instance, if you did not read that contract in full there could be some very serious repercussions to filing for bankruptcy. You might find yourself unexpectedly on the hook for the full amount of the loan right away.
If you are considering a reverse mortgage to pay your debts make sure that you understand every part of the paperwork including default or acceleration clauses, tax obligations, insurance requirements, and what will happen if you want to sell the home, or what constitutes a termination of occupancy. The Consumer Financial Protection Bureau holds that you must be out of the home for 12 consecutive months – either living somewhere else or in a custodial situation such as a nursing home. If you have a co-borrower they may remain in the home.
If your reverse mortgage lender is seeking a foreclosure action against you, filing a Chapter 13 bankruptcy can buy you some time to sort out your finances through the provision of the automatic stay. Payment plans can take care of deliquencies in property taxes and allow you to obtain acceptable homeowner’s insurance and catch up on premiums. So long as you are a “borrower” under the reverse mortgage terms, you may cure the defaults related to taxes and homeowner’s insurance through a Chapter 13.
Van Horn Law Group has years of experience in dealing with all sorts of debt in all sorts of situations. Our expert attorneys and staff don’t shrink away from the tough stuff. We can help you with all of your reverse mortgage questions, regardless of whether you are thinking for filing for bankruptcy. Our offices in Fort Lauderdale and West Palm Beach are open Monday through Saturday and we welcome walk-ins! Bring your paperwork to your free initial consultation, get our best legal advice and let’s get started on giving you back your life after debt.
1 See, In Re Nunez [https://casetext.com/case/reverse-mortg-solutions-inc-v-nunez] (citing Smith v. Reverse Mortgage Solutions, 200 So. 3d 221, 226 (Fla. 3d DCA 2016)(holding that a person may be “the borrower” for purposes of the rights and obligations under a reverse mortgage even if the person is not the actual borrower under the loan, only if the plain terms of the mortgage unambiguously show: (1) the mortgage was executed by both the actual borrower and the other person; and (2) each borrower is protected from the foreclosure of the mortgage until both borrowers die.)
2 The scope of the homestead exemption is partially limited as to size of the property, depending where the property is located. If the homestead is located within a municipality, the homestead will be protected up to one-half acre. But if the homestead is located outside a municipality, the protection will only extend over 160 acres of the property.
3 In Re Nunez [https://casetext.com/case/reverse-mortg-solutions-inc-v-nunez]
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