Understanding Reverse Mortgage Repayment

A reverse mortgage is a type of home loan available to homeowners age 62 and over, allowing them to borrow against the equity in their home. Unlike a traditional mortgage, where the borrower makes monthly payments to the lender, a reverse mortgage provides the borrower with payments from the lender. However, the loan balance grows over time and must be repaid eventually.

The loan balance of a reverse mortgage includes the principal amount borrowed, plus interest and fees. The borrower is not required to make monthly payments, but they are responsible for paying property taxes, homeowners insurance, and maintaining the home.

When is a Reverse Mortgage Due?

A reverse mortgage becomes due and payable when:

• The borrower passes away
• The home is sold or title is transferred
• The borrower moves out of the home for more than 12 months
• The borrower fails to pay property taxes or homeowners insurance
• The home falls into disrepair

When the loan becomes due, the lender will send a due and payable notice, giving the borrower or their heirs 30 days to repay the loan. This grace period can often be extended up to six months to allow time to settle the loan.

Repayment Options for Borrowers

If the borrower is still living and the loan becomes due, they have several options for repayment:

Heirs and Reverse Mortgage Repayment

When a borrower with a reverse mortgage passes away, the heirs inherit the home and are responsible for repaying the loan. The lender will send a due and payable notice, giving the heirs 30 days to decide how they want to proceed.

Options for Heirs to Settle the Loan

Heirs have several options for settling a reverse mortgage:

Understanding the Heir’s Obligations

It is important to note that heirs are not personally liable for the debt of a reverse mortgage. If the loan balance is more than the home is worth, the heirs are not obligated to pay the difference. In this case, the lender would make a claim to the FHA mortgage insurance to cover the remaining balance.

The heirs also have the right to purchase the home for 95% of the current appraised value, even if the loan balance is higher. This can be an attractive option if the heirs want to keep the home in the family.

Selling the Home to Repay a Reverse Mortgage

Often, the simplest way to repay a reverse mortgage is by selling the home, either by the borrower or the heirs. The proceeds from the sale will go first to pay off the loan balance, with any remaining equity going to the borrower or heirs.

The Home Sale Process

To sell the home and settle the reverse mortgage:

1. The home is listed for sale, either by the borrower, heirs, or the lender
2. Once sold, the proceeds are used to pay off the loan balance
3. Any remaining money from the sale goes to the borrower or heirs
4. If the sales proceeds are not enough to cover the loan balance, FHA insurance will cover the difference

It is important to work with a real estate attorney or financial advisor during this process to ensure all steps are handled correctly.

Handling a Loan Balance Higher than Home Value

In some cases, the loan balance of a reverse mortgage may be higher than the market value of the home. However, reverse mortgages are non-recourse loans, meaning the borrower or heirs will never owe more than the value of the home.

FHA insurance will cover the difference if the home sells for less than the loan balance. The heirs are not personally responsible for paying the remaining balance. This mortgage insurance is a requirement of HECM reverse mortgages and provides important protection for borrowers and heirs.

See also:

• What Happens if You Inherit a House with a Reverse Mortgage
• What Happens to a Mortgage When Someone Dies Without a Will
• What Happens to My Reverse Mortgage if I Go Into a Nursing Home
• When Do You Stop Paying Mortgage When Selling a House
• What Disqualifies You From Getting a Reverse Mortgage? – Explained