What happens at the end of a reverse mortgage?
Reverse mortgages differ from other types of mortgages and loans in that there is not a set timeline for the loan when it’s established. A reverse mortgage goes on indefinitely until a maturity event occurs.
There are three events that typically end a reverse mortgage contract:
- The last surviving borrower passes away.
- The last surviving borrower sells or conveys title to the house.
- The borrower(s) fail to pay property taxes or insurance, or does not maintain the property.
At this point, the loan has reach maturity. The maturity event triggers a process to close completely and repay the loan.
What happens next?
The first step is typically a notice sent by the lender that the loan is due and payable. This notice is usually sent to the borrower, or to the borrower’s heirs if he or she has passed away, within 30 days of the maturity event.
Since many reverse mortgages are repaid by selling the home, lenders will provide six months to a year to get that accomplished. How much time you get to sell the property may vary by lender, so you should discuss that before a maturity event occurs, ideally during the application process.
If after that initial period your home has not sold, but the parties involved are at least making a reasonable effort to do so, they can usually apply for an extension. This extended period is generally 90 days. A second extension could also be granted, depending on the lender, provided efforts are still being made to sell the property.
Even with the amount of time afforded to close the loan, borrowers or their heirs should finish the process as quickly as possible. That’s because once the loan has matured, monthly payments stop and there can be no further access to a line of credit.
At the same time, however, interest will continue to accrue on the loan until it closes, as will service fees and mortgage insurance premiums. Property taxes and insurance will also need to continue to be paid.
Once the loan has reached maturity, the lender will have the property appraised. If it is worth less than the loan balance, then the amount due is equivalent to 95 percent of the appraised value; heirs will not have to pay the full loan balance. The FHA insurance will cover the difference.
For example, if the loan balance is $150,000, but the property only appraises at $100,000, the heirs will only have to pay $95,000 back to the lender.
In this scenario, the home must be listed for sale no less than the appraised value. The 5 percent cushion is designed to cover selling costs.
If your loan balance exceeds the value of the home, your estate nor your heirs have to cover the difference. That’s because reverse mortgages are non-recourse loans, which means if the borrower defaults or can’t cover the loan balance, the lender can only claim the property that is securitizing the loan; that is, the house from which the reverse mortgage was obtained. The lender cannot seize other assets from the borrower to make up the difference.
Another option if there is no equity in the home at the time of sale is a “deed in lieu of foreclosure.” This involves a voluntary transfer of the property to the lender in exchange for a release from the reverse mortgage contract. This is a good option if you know your home will not sell for an amount large enough to cover the loan balance on the reverse mortgage, as it removes the burden of trying to sell it while interest and taxes continue to accumulate.
Keep in mind that the only requirement is that the loan is repaid; the lender won’t care where the proceeds come from. While this is usually done through the sale of the property, the money could also come from other sources, such as a life insurance policy or sale of other assets in the deceased’s estate. Some lenders will even allow heirs to refinance the reverse mortgage loan into a traditional mortgage and make monthly payments.
Once the loan officially closes and is repaid, there’s nothing left for the borrower or their heirs to do. If the loan is repaid using proceeds from the property sale and the sale price exceeds the loan balance, then the borrower, the borrower’s estate, or the borrower’s heirs will receive the difference. So if the home sells for $250,000 and the loan balance is $100,000, the estate will keep $150,000 — minus agent fees and settlement costs.