But a reverse mortgage is a loan, which means it will need to be paid back at some point. If you are exploring reverse mortgages, it’s important to understand how this aspect of them works.
In this article, we’ll explore the intricacies of reverse mortgages, pinpointing when repayment is required, and explore the various options available to borrowers and their families.
Whether you’re considering a reverse mortgage, currently have one or are an heir to a property with a reverse mortgage loan, our goal is to equip you with the knowledge to navigate the repayment process with confidence.
Understanding Reverse Mortgages
The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which is backed by the federal government through the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA).
A HECM reverse mortgage is a special type of home loan designed for homeowners aged 62 and older. It allows them to access equity in their homes without the requirement of making monthly payments.
Instead of the borrower paying the lender, the roles are reversed, and the lender makes payments to the borrower based on the equity they have in their home, similar to a home equity loan or home equity line of credit (HELOC).
A reverse mortgage provides reverse mortgage proceeds in the form of monthly installments, a line of credit, or a lump sum that can be used for covering living expenses, medical bills, home repairs and upgrades, or supplementing retirement income.
The amount a homeowner can borrow depends on several factors, including the home’s value, the borrower’s age, and current interest rates. The older the borrower and the more valuable the home, typically the larger the available loan amount.
While borrowers are not required to make monthly mortgage payments, they must keep up with property taxes, homeowners’ insurance, and keep the home in good condition.
The property in question must also be the borrower’s primary residence. This means they need to live in their home most of the year, and the property needs to remain their primary residence throughout the life of the loan.
Reverse Mortgage Payoff: When Repayment is Due
There are certain events that can trigger the reverse mortgage balance to be repaid. Understanding these triggers is essential for borrowers and their family members to plan appropriately and avoid any surprises.
Here are the primary circumstances under which a reverse mortgage becomes due:
- Sale of the Home. If the borrower decides to sell the home, the reverse mortgage must be paid off as part of the sale process. The proceeds from the sale are typically used to repay the loan balance, with any remaining equity going to the borrower.
- Permanent Move or Relocation. A reverse mortgage requires the borrower to maintain the property as their principal residence. If the borrower moves out permanently, for example, to a long-term care facility or another residence, the loan becomes due. Generally, 12 consecutive months of non-occupancy is considered a permanent move.
- Failure to Meet Loan Obligations. Borrowers are required to pay property taxes, maintain homeowners’ insurance, and keep the property in good condition. Failure to meet these obligations can lead to the loan becoming due.
- Borrower’s Passing. The death of the last remaining borrower is a common trigger for the repayment of a reverse mortgage. Upon their passing, the loan balance becomes due, and heirs or estate executors must address the repayment.
How to Pay Back a Reverse Mortgage Loan
When the time comes to repay a reverse mortgage, borrowers have several strategies at their disposal.
Here are the primary avenues for repaying a reverse mortgage:
- Repayment from Other Assets. The loan can be repaid using funds from the borrower’s estate or other assets, preserving the home for heirs.
- Sale of the Property. The home can be sold, and the proceeds used to repay the loan.
- Refinancing the Loan. In some cases, the reverse mortgage can be refinanced into a traditional mortgage.
- Deed in Lieu of Foreclosure. If the borrowers decide not to keep the property, a deed in lieu of foreclosure is an option to satisfy the loan by transferring the property to the reverse mortgage lender.
Professional advice from financial advisors, real estate experts, and legal counsel can provide invaluable guidance during this decision-making process, ensuring that borrowers make informed choices that align with their financial goals and circumstances.
The Role of Heirs in Reverse Mortgage Repayment
If the last surviving borrower passes away while he or she still has a reverse mortgage, their heirs will be faced with important decisions regarding the property and the outstanding balance of the loan. Understanding their roles, rights, and options can help them navigate the repayment process more effectively.
Immediate Actions Upon the Borrower’s Passing
- Notification. Heirs must promptly notify the lender of the borrower’s passing. This initiates the repayment process and starts the timeline within which actions must be taken.
- Evaluation of the Estate. Heirs should assess the estate’s value, including the home and any other assets, to determine the best course of action for repaying the reverse mortgage. It may be advantageous to meet with a financial advisor or family attorney to assist this step in the process.
Options Available to Heirs
Heirs will have the following options available to them:
- Keep the Property. If heirs wish to keep the home, they can choose to repay the reverse mortgage through refinancing into a regular mortgage or using other available assets.
- Sell the Property. Heirs may opt to sell the home to pay off the reverse mortgage. If the home’s sale price exceeds the loan balance, heirs can keep the remaining equity.
- Deed in Lieu of Foreclosure. In situations where neither keeping the home nor selling it is viable, heirs might consider a deed in lieu of foreclosure. This option involves handing over the property to the lender and satisfying the loan without going through a formal foreclosure process.
- Do Nothing. Ultimately, heirs don’t have to do anything to settle the loan. In nothing is done to pay back the loan, the lender will simply foreclose on the property.
Decision-Making Process
These are some recommendations that may help with deciding the best course of action for you:
- Consult with Professionals. Seek advice from financial advisors, estate attorneys, and real estate professionals to understand the implications of each option and to navigate the legal and financial aspects of the repayment process.
- Communicate with the Lender. Open and ongoing communication with the lender is essential. Lenders can provide specific details about the loan balance, deadlines for decision-making, and potential solutions tailored to the heirs’ circumstances.
- Consideration of Timelines. Lenders typically provide a timeline, often six to 12 months, to decide and act on the repayment of the reverse mortgage. This period allows heirs to assess their options, potentially refinance the loan, or prepare the property for sale.
- Legal Protections. Reverse mortgages are non-recourse loans, heirs are not personally liable for any deficit if the property’s sale does not cover the loan balance.
FAQs
Can a reverse mortgage borrower repay a reverse mortgage before it is due?
Yes. Reverse mortgage borrowers can start paying back the loan before it is due. There is no penalty for paying back a reverse mortgage loan early.
What if the reverse mortgage loan balance is more than what the home is worth?
Reverse mortgages are non-recourse loans. Borrowers will never owe more than the loan balance or the home’s value, whichever is less. This means if the sale of the home does not cover the full amount of the loan, neither the borrowers nor their heirs are personally liable for the shortfall.
[Source: HUD HECM Handbook]
Are heirs obligated to pay back the reverse mortgage loan?
No, heirs are not obligated to pay back a reverse mortgage loan. If they don’t want to keep or sell the home, they have the option of signing the deed over to the lender or doing nothing and allowing the property to go into foreclosure.
How much time do you have to pay back a reverse mortgage?
A reverse mortgage loan becomes due and payable as soon as a triggering event occurs. If the heirs want to sell the home, lenders typically provide six months to complete the transaction. Two 90-day extensions are typically provided if it can be demonstrated that the heirs are actively trying to sell the home.
What happens if you don’t pay back a reverse mortgage?
Just like with a traditional mortgage, if you don’t pay back the reverse mortgage according to the agreed terms, the lender will be forced to foreclose on the property.
Have More Questions?
Each homeowner’s financial situation is unique. The best way to ensure that all questions you have about your situation are addressed is to talk to one of our reverse mortgage advisors.
Many of our reverse mortgage specialists have decades of experience in the mortgage industry and have helped older homeowners solve various problems.
Reach out today by filling out the form on this page or by using our directory to find a reverse mortgage loan officer in your area.
Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
