This guest blog post is written by Dan Lindsey, Director of the Consumer Practice Group at LAF.
A reverse mortgage (also called a “Home Equity Conversion Mortgage,” or a “HECM”) is a special kind of mortgage. You as the homeowner are given money based on your age and the value of your home. You do not have to make monthly payments like a normal mortgage. Instead, the debt grows over time, as interest and fees are added, and it all comes due when you die or move out (say, to a nursing home).
Using a reverse mortgage to stop a foreclosure
If you are facing foreclosure, it is possible to use a reverse mortgage to get the money you need to pay your outstanding balance. But you must:
- qualify for a reverse mortgage in the first place;
- get enough money to pay off your mortgage; and
- pay off the mortgage before the sale.
Let’s take each of these in turn.
To qualify, you must be at least 62 years of age and live in the home. You also need a stable minimum income. This is because, like any homeowner, you still must pay for property taxes, hazard insurance, maintenance, and utilities.
Getting enough money
Even if you qualify for a reverse mortgage, you must be able to get enough money to pay off your current mortgage, plus any other debts secured by your home (say, a home improvement loan or a tax lien). Reverse mortgage proceeds will be higher the older you are, and the greater the value of your home. You can get an idea of how much money will be available from a reverse mortgage by using an online calculator.
Paying off before the sale
To avoid foreclosure, you must be able to pay off the mortgage debt before a foreclosure sale is held. Indeed, this is the hard and fast deadline for taking any action to save your home.
But even after a foreclosure case is filed and the paperwork is delivered to you, a sale cannot go forward for at least another 7 months. So you have time if you act early. At LAF we have been able to help some homeowners avoid foreclosure even near the end of the process—but it is much harder.
Tips for success
Whether you’re trying to get a reverse mortgage, or doing something else to avoid foreclosure, there are a few good rules of thumb to keep in mind:
- Act early. Reach out as soon as you are in trouble. The best source of help for a homeowner in distress is a HUD-certified housing counseling agency. These agencies have been approved by HUD (the US Department of Housing and Urban Development). They are non-profits which will not charge you a fee. They are specialists in helping homeowners work with lenders or seek other alternatives to foreclosure. They are listed on HUD’s website.
- Be proactive. It is almost never a good idea to respond to people advertising foreclosure assistance—whether through the mail or on TV, the radio, or a telephone pole. Such people will almost always charge you a fee, and they may well rip you off. Stick with the HUD-certified housing counselors mentioned above.
- Seek legal help if a foreclosure is filed. If a foreclosure has been filed, seek legal help, which may be available no-cost or low-cost, depending on your income. LAF is a non-profit legal aid agency, and we do not charge for our services. If you are in Cook County, you can call us at (312) 341-1070. You can also use the Get Legal Help tool to get assistance in your area.
- Don’t avoid talking to your lender. In some cases, you may want to try to work something out directly with your lender. Don’t worry that communicating with your lender will speed up the foreclosure process. It won’t, and it may even slow things down. In many cases, the lender would prefer to work something out rather than foreclose.
Understand the cost
One final thought. As explained above, it is possible to use a reverse mortgage to pay off your mortgage debt and avoid foreclosure. In some cases, this will work, and it may be your only option. Understand, however, that reverse mortgages are expensive. Up-front fees run about 8-10% of the loan proceeds. For a regular forward mortgage, fees are usually no more than 1%. So if you can pay off your mortgage debt with a regular mortgage, you may be better off doing so.
This information is posted as a public service by Illinois Legal Aid Online and its partners. Its purpose is to inform citizens of their legal rights and obligations. Consult your lawyer if you have questions about the application of the law in a particular case.