When are reverse mortgage payments due? How does the payment options work for HECM reverse mortgage?
Reverse mortgages can be beneficial to retirees by allowing them to convert their home equity into cash, a stream of monthly payments or line of credit. It gives them the ability to liquidate part of their most valuable asset — their home — while still being able to live in it. At the same time, there are no monthly payments to make.
But make no mistake, it is a loan — one that eventually must be repaid. It’s during the repayment period that reverse mortgages can become a hassle, largely because the person who took out the loan may not be the one dealing with how to repay it.
Reverse mortgages differ from traditional home equity loans and mortgages in that the homeowner does not make monthly payments to repay the loan. Instead, A reverse mortgage places a lien on the property. The loan is due, with interest, when the homeowner(s) die, sell the property or permanently move out of it.
Repayment basics
If the loan was granted to a single borrower, it becomes due once that homeowner passes away, decides to sell/downsize, and or exits the property for 12 consecutive months.
If one spouse has died and a surviving spouse is listed as a borrower on the reverse mortgage, he or she can continue to live in the home, and the terms of the loan do not change. There would be no repayment due under this scenario.
In some cases, a surviving spouse may be able to continue living in the home if he or she was not listed as a co-borrower. This sometimes occurs when a borrower keeps a younger spouse off the loan to secure a larger amount. The rules for surviving non-borrower spouses are complicated, and they may need to consult an attorney if they want to continue occupying the property.
If the reverse mortgage is FHA insured, there are two ways the borrower’s heirs are protected. First, none of the accrued debt is passed on and the lender can not go after other parts of the deceased’s estate or its heirs. Second, the payback amount can never exceed the home’s appraised value, even if the property depreciated in value since the reverse mortgage was granted. This non-recourse feature protects the senior homeowners and their families if things go awry.
The repayment process
Once the lender learns of a borrower’s death, it will send a notification to relatives or the executor of his or her estate that the loan is due. Therefore, it’s important that your children and whoever will be handling your affairs after your passing are aware of the reverse mortgage, so it doesn’t surprise them.
The lender will have the property appraised. If it is worth less than the loan balance because it declined in value, 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.
Another option if there is no equity in the home at the time of sale is to sign the deed directly to the lender. This is called a “deed in lieu of foreclosure.”
On the other hand, if the home is worth more than the balance of the loan, the remainder goes to the borrower’s estate or the heirs. 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.
Repayment options
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.
Lenders will typically provide heirs six months to either sell the home or come up with the funds needed to pay back the loan. But until the loan is settled, the lender will continue to charge interest on the balance plus monthly insurance premiums.
Heirs can request up to two 90-day extensions. For those requests to be granted, they must show evidence that they are arranging the financing to keep the house or actively trying to sell the house, such as providing a listing document or sales contract.