Eminent Domain: What Happens to a Home with a Reverse Mortgage?

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Eminent Domain: What Happens to a Home with a Reverse Mortgage?

When a house or other property is taken to make room for a public project like a new road, bridge, or school, the government may exercise the power of eminent domain to do so.

According to the Fifth Amendment’s takings provision, the owner must get reasonable compensation for their loss. The fair market value of the property must be paid to the owner, according to court rulings.

Due to the fact that the homeowner’s equity grows as they make mortgage payments, the amount in a regular mortgage may be sufficient to purchase a new house. However, if the homeowner has a reverse mortgage, the circumstances can be substantially different.

Key Takeaways

  • Even though eminent domain instances involving houses with reverse mortgages are uncommon, they may occur and provide difficulties for borrowers.
  • In contrast to conventional forward mortgages, reverse mortgages cause a homeowner’s equity to decline, sometimes leaving little more than what is required to pay back the loan and not enough for a new house, even if the fair market value of the condemned property is obtained.
  • The amount of the home’s worth that is borrowed against and whether prices are rising in a certain housing market are two crucial variables.

How Eminent Domain Works

Eminent domain refers to the authority of a government—federal, state, or municipal—to appropriate private land for public use after receiving reasonable compensation. Numerous nations throughout the world engage in this activity under various names. Eminent domain legal issues are frequent, particularly when the property owners believe they have not been appropriately paid, since it may not appear fair to them.

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Eminent Domain and the Reverse Mortgage

The compensation amount and the equity in the house may be sufficient to cover the cost of a new house or at the very least the down payment on a new mortgage. However, if the homeowner also has a reverse mortgage, it’s possible that there isn’t enough equity left in the property to pay off the loan and purchase a new home with the compensation payout.

If the homeowner has a sizable amount of equity in the house, the odds may be better. Since the reverse mortgage was acquired, the home’s value may have grown, or the homeowner may have kept a significant amount of equity in the property by only taking out a small amount of debt.

The worst-case situation is when the homeowner has taken a large portion of the property worth in reverse mortgage payments and hasn’t had enough time (or good fortune) to benefit from a sizable rise in the value of the property. In some situations, the government reimbursement can be much less than the price of replacement.


Homeowners could incur additional expenses that aren’t often paid by eminent domain, such those for assessments and relocation.

Home Value

The issue comes when the homeowner’s equity in the property is low due to the amount borrowed, leaving them with little real money to receive from the condemning authority settlement.

In one instance from 2012, an Oregon homeowner who needed to sell her house for a road project was given just enough money to pay off her reverse mortgage. The state agency ultimately consented to let the lady, who was then in her mid-80s, to reside in a residence held by the agency rent-free for as long she required.

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Such circumstances are less common now that property values are rising quickly. According to David Henson, managing partner of Henson Fuerst in Raleigh, North Carolina, an expert in eminent domain and associated property law, a home’s worth is likely to be more than the sum borrowed years ago.

However, home markets do experience downturns sometimes. State laws may vary, but courts and condemning authorities are unlikely to take the homeowner’s debt into account.

Property Value vs. Debt

The worth of the item before they steal it and the damages that occur, according to Henson, are the real essential factors. The debt has no bearing on how the damages are settled or proven if a jury trial is required.

Many homeowners in this position must pay additional costs that aren’t often covered by eminent domain lawsuits, such assessment fees and relocation charges.

Similar to conventional forward mortgages, it’s important to pay attention to the loan agreement’s terms. It ought to specify what happens if the property is condemned. Additionally, it should specify that the homeowner will get the funds, albeit the final arrangement will need to be approved by the lender.

How Does Eminent Domain Work?

The ability of a local, state, or federal government to take possession of land that is judged necessary for the common good is known as eminent domain. Owners of such property must get reasonable compensation, according to the Fifth Amendment of the United States Constitution. According to popular consensus, this implies that the property owners will get their fair market value.

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How Does an Eminent Domain Proceeding Affect a Reverse Mortgage?

Similar to a conventional or forward mortgage, the government pays the property owner, who is then responsible for paying down any remaining house loan debt.

In a best-case scenario, a property owner who has substantial equity in it may be able to replace it using the money received from the government.

In a reverse mortgage, the amount borrowed plus interest and other repayment obligations have diminished the owner’s equity. In certain situations, the equity plus the government compensation may not be sufficient to purchase a new property.

How Can I Protect My Property From Eminent Domain?

Nobody has a lot of power to prevent eminent domain from taking your property. The public’s or the government’s future demands cannot be predicted. Although it may seem unjust, there are few ways for property owners to prevent the government from seizing their possessions.

The Bottom Line

When a homeowner uses a reverse mortgage, an eminent domain condemnation may significantly worsen their financial and housing conditions, especially if a significant amount of the home’s equity has already been taken out.

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