What happens to a reverse mortgage?

The right of eminent domain is used by a government entity when a house or other property is seized to make way for a public project such as a new road, bridge or school.

The taking clause of the Fifth Amendment to the United States Constitution requires that the owner be justly compensated for the loss. The courts have taken this to mean that the owner should receive the fair market value of the property.

In a typical mortgage, the amount may be enough to pay for a new home because the homeowner’s equity increases as they make their mortgage payments. However, the situation might be somewhat different if the owner has taken out a reverse mortgage.

Key points to remember

  • Eminent domain cases on reverse mortgage properties are rare, but they can occur and cause complications for borrowers.
  • Unlike traditional term mortgages, a homeowner’s equity declines in reverse mortgages, potentially leaving little more than is needed to pay off the loan and not enough for a new home, even if fair market value is received. for condemned property.
  • How much of the home’s value is borrowed and whether values ​​appreciate in a particular home market are two critical factors.

How Eminent Domain Works

Eminent domain is the power of a government, whether federal, state or municipal, to take private property for public use, after payment of just compensation. This practice occurs in many different countries under different names. This may not seem fair to the owners of the property, and eminent domain cases, particularly where owners feel they have not been fairly compensated, are quite common.

Eminent Domain and the Reverse Mortgage

The offset payment, when combined with home equity, can be enough to pay for a new home or at least provide a down payment on a new mortgage. But if the homeowner has a reverse mortgage, they may not have enough equity left in the home to pay off the loan and buy a new home using the make-up payment.

Their odds may be more favorable if the owner has significant equity in the property. The home may have increased in value since obtaining the reverse mortgage, or the homeowner may have retained significant equity in the home by only borrowing a limited amount.

The worst-case scenario occurs when the owner has taken a substantial portion of the property’s value in reverse mortgage payments and has not had enough time (or enough luck) to take advantage of a substantial increase in the value of the property. the property. In such cases, the government payment may be well below replacement cost.

Important

Owners may face additional costs, such as appraisals and relocation, which are not necessarily covered in all eminent domain cases.

home value

The problem arises when the amount borrowed leaves the owner with little equity in the property and therefore little real money from settling with the sentencing authority.

In a 2012 case, an Oregon homeowner was offered just enough money to pay off her reverse mortgage when the state Department of Transportation needed her home for a road project. The state agency eventually agreed to let the woman, then in her mid-80s, live in a house the agency owned rent-free for as long as she needed.

In an age of rapid home appreciation, such situations are less likely. The value of a home is likely to exceed the amount borrowed years ago, notes David Hensonmanaging partner of Henson and Fuerst of Raleigh, North Carolina, an expert in eminent domain and related property law.

However, downward swings are occurring in housing markets. Although the law varies from state to state, sentencing authorities and courts are not likely to consider homeowner debt.

Property Value Vs. Debt

“The relevant factor is really what the value of the property was before they took it, what was the value of the property and what damage resulted from it,” Henson said. “Debt is irrelevant to how damages are negotiated or judged if they go before a jury.”

Many landlords in such a situation face additional costs, such as appraisal fees and moving costs, which are not necessarily covered in eminent domain cases.

As with traditional term mortgages, the language of the relevant loan agreement is crucial. It should specify what happens in the event of a condemnation of the property. It should also state that the proceeds should go to the owner, although the lender will need to approve the final arrangement.

How does Eminent Domain work?

Eminent domain is the right of a local, state, or federal government to acquire property deemed necessary for the public good. The Fifth Amendment to the United States Constitution requires that the owners of such property be fairly compensated. This usually means owners will be paid fair market value.

How does an eminent domain proceeding affect a reverse mortgage?

The impact is largely the same as on a traditional or term mortgage. In other words, the government pays the homeowner, who will then have to pay any outstanding balance on the home loan.

In the best-case scenario, an owner who holds significant equity in the property can replace it, using the government payment.

In a reverse mortgage, the homeowner’s equity has been reduced by the amount borrowed plus interest and other repayment charges. In such cases, the equity and government payment combined may not be sufficient to purchase a replacement home.

How can I protect my property from Eminent Domain?

There’s not much anyone can do to protect your property from eminent domain. It is not possible to anticipate the future needs of the public or the government. It may seem unfair, but homeowners don’t have many options to protect their property from government seizure.

The essential

An eminent domain conviction can seriously complicate the financial and housing situation of homeowners using a reverse mortgage, particularly if a large portion of the equity in the home has been removed.