Reverse mortgages can be a helpful tool for accessing home equity without selling the property. They can also be used for the purchase of property to preserve equity.
However, they come with responsibilities that homeowners must manage to avoid defaulting on the loan. Whether your clients are using a reverse mortgage to address financial needs or simply tapping into the value of their home, it’s important to understand the requirements involved.
Here are four key things homeowners should do to prevent default on a reverse mortgage.
1. Pay Property Taxes on Time
Failure to pay property taxes on time can result in a default, which puts the home at risk of foreclosure.
Homeowners should budget carefully and set reminders to ensure property taxes are paid by their due dates. If cash flow is a concern, they should consider setting up a savings account into which they can deposit funds monthly or into which they can make automatic payments to help manage these expenses effectively.
2. Maintain Homeowners Insurance Coverage
Keeping valid homeowners insurance coverage is another requirement for maintaining a reverse mortgage.
The lender needs to know that the home is protected against potential risks, such as fire or natural disasters. A lapse in insurance coverage can lead to default, and the lender may even purchase insurance on your client’s behalf at a much higher cost.
Clients should review their insurance policies annually to confirm that they provide adequate coverage, as well as paying premiums on time to prevent any lapses.
3. Keep the Property in Good Condition
The lender has a vested interest in the value of the home, and if the property falls into disrepair, they may declare the loan in default.
Routine maintenance such as roof repairs, plumbing fixes, and lawn care should not be ignored. Addressing issues as they arise can prevent small problems from becoming costly repairs and help clients meet their obligations under the reverse mortgage agreement.
It is not unheard of for lenders to use drones to check on the condition of the property for aspects they can’t see in a drive-by viewing.
4. Use the Home as the Primary Residence
To avoid defaulting on a reverse mortgage, homeowners must continue to use the home as their primary residence.
This means that if they plan to move out for an extended period—whether for work, travel, or health reasons—they could be at risk of default. Lenders typically require that the home remains the main residence for the duration of the loan.
Lenders will send out mail notices annually to confirm that the borrower still resides in the home.
If circumstances change and the borrower can no longer reside in the home, it’s crucial to notify the lender and discuss possible options.
Reverse mortgages provide financial relief but require adherence to the responsibilities that will avoid default. To protect their investment, clients need to stay current on property taxes, maintain insurance, keep their homes in good condition, and make sure they remain in the property as their primary residence.
The Minchella & Associates Difference
With over 40 years of experience in Illinois real estate law, Erica Minchella has represented thousands of home sellers and buyers, landlords, and commercial and investment property owners. For more information, schedule a consultation today.
