These days, the print and online media are filled with stories of reverse mortgage borrowers that feel they were wronged by their lender. Typically, they report that everything was going fine until they were forced to (temporarily) move out of their homes, at which point the reverse mortgage was recalled by the lender. Critics cite these stories as evidence that reverse mortgages are inherently risky and inherently awful. The way I see it, however, the blame for such horror stories resides primarily with the borrower, who failed to understand the implications of moving out.

There is a misconception among borrowers that reverse mortgages are vastly different from regular loans, and that because they are insured by the FHA, the borrower is under no immediate obligation to repay the loan. In reality, a reverse mortgage is still a loan, and is subject to a standard loan agreement. Accordingly, the reverse mortgage needs to be repaid immediately (actually a one year grace period is available upon request) after the borrower permanently moves out of the home and/or passes away. Under such circumstances, if the borrower or his heirs are not able to repay the loan (plus interest and fees) in cash, the property will naturally be foreclosed upon and sold by the lender.

In order to combat fraud/abuse of the terms of the reverse mortgage, lenders typically define permanently moving out as residing outside of the property for more than one year. In practice, the lender will recall the reverse mortgage and initiate foreclosure proceedings if the one year time limit is breached.

Unfortunately, there are borrowers who are stricken with health problems that require extended stays in hospitals, rehab centers, or even nursing homes. Such borrowers are understandably horrified when such stays are interpreted as moving out, and return to their homes only to discover that they have breached the terms of the loan agreement and that the reverse mortgage has been recalled by the lender. Even worse, such borrowers may have spent a significant portion of their savings on healthcare expenses, and cannot afford to repay the loan. As a result, the lender has no choice but to force the sale of the property.

That’s not to say that borrowers don’t also have rights. When the lender forecloses on the property, any proceeds left over from the sale of the house will be distributed to the borrower or his estate. If the reverse mortgage had only been outstanding for a few years, these proceeds should still be sizable. In addition, if the borrower has any desire to repay the loan in cash or through a fresh loan, he will typically be granted one year to make arrangements to do so. Throughout this entire process, the home belongs to the borrower. Even though the lender has a lien on the property (via the reverse mortgage), this is not equivalent to ownership.

Unfair as it may seem, borrowers should make sure they are aware of such clauses prior to signing the reverse mortgage contract. They should further make sure that they understand what will happen in the event that they are forced to involuntarily vacate their primary residence while the reverse mortgage is still outstanding, and that they have a contingency plan for such an occurrence. In the end, borrowers that determine that the risks of a reverse mortgage outweigh the benefits can use their discretion to simply not obtain one.