What Happens to a Reverse Mortgage After Death or When a Reverse Mortgage Becomes Due?
It’s well-known that many Americans (more than half, actually) are far from prepared for retirement. So to fill gaps in their retirement income, some are finding that reverse mortgages can fit into their financial planning.
But, like any financial product, reverse mortgages can be complex and must be fully understood by borrowers.
For starters, a reverse mortgage is a loan that converts some of your home equity into cash flow. A home equity conversion mortgage (HECM) is a reverse mortgage insured by the Federal Housing Administration and is the most common reverse mortgage.
Depending on your age and current interest rates, a portion of the equity that you have built up over years of making mortgage payments can be made accessible to you through a reverse mortgage.
The draw to this product for many retirees is that no monthly payments on the loan are required. However, what some borrowers don’t realize is that they are still required to pay real estate taxes, utilities and hazard and flood insurance premiums while they have a reverse mortgage.
Failing to maintain these payments and keep the house in good repair may be grounds for calling your loan due and payable.
So what exactly happens when your reverse mortgage becomes due? And what other circumstances may trigger the loan to become payable? Reverse mortgage experts weighed in to explain.
Why a Reverse Mortgage Does Becomes Due
A reverse mortgage loan has to be completely paid off when the last surviving borrower dies, sells the home, or moves out for one continuous year, which includes moving to a different home, as well as moving into an assisted living facility or nursing home.
The loan also becomes due if you stop paying your property taxes or homeowners insurance, or fail to maintain the property in good repair. While you don’t have a monthly mortgage payment, it’s important to remember you still have other payments you must maintain or else the loan will become due. “Failure to pay taxes and insurance is the number one reason behind most of the [reverse mortgage] foreclosures,” says Dan Larkin, divisional sales manager of Schaumburg, Illinois-based PERL Mortgage, Inc.
However, the most common scenario when a reverse mortgage becomes due is that the borrower has passed away, says Ryan LaRose, president and chief operating officer of Celink, a reverse mortgage servicer.
When a borrower dies, the servicer becomes aware of his or her death through public records and sends out a condolence letter to contacts listed on the loan, notifying heirs that the loan has become due and payable.
Once the reverse mortgage is due, it must be paid back in full in one lump sum, LaRose says.
Is a Reverse Mortgage Right for You?
Who to Contact When the Reverse Mortgage Loan Becomes Due
Maintaining regular communication with the borrower’s reverse mortgage servicer is imperative during this process.
“The biggest thing is knowing that your best resource is to pick up the phone and call the servicer,” LaRose says. “If we don’t know what’s going on, we have to assume the worst — that they have no intentions of paying off the loan.”
So keeping in close contact with the servicer can actually be a benefit to the heirs, or those responsible for the borrower’s estate.
“The sooner you can contact the servicer, the more time you’re going to have [to pay off the loan], which means the more options that are on the table,” LaRose says.
Options for Paying Off the Reverse Mortgage Loan
Because a reverse mortgage must be paid off in full when it becomes due, it is often easiest for heirs to sell the home to repay the loan.
If your home is worth more than the loan balance, then you will get to keep the difference, under Department of Housing and Urban Development (HUD) rules. If your home is worth less than the loan balance, your heirs won’t owe any additional money beyond what the home is worth.
But if heirs plan to sell the home, they need to inform the reverse mortgage servicer and provide documentation, such as a real estate listing agreement, that shows this is the route they’re taking, LaRose says.
If your heirs want to keep the home, they’ll need to pay off the loan immediately. If the loan balance is more than the home is worth, heirs will typically only have to pay what the home is worth, not the full loan balance, according to federal regulator the Consumer Financial Protection Bureau. With a HECM loan, heirs can satisfy the loan by paying 95% of the appraised value of the home.
How to Get an Extension
Staying in constant communication with the reverse mortgage servicer can help extend the amount of time heirs have to repay the loan, LaRose says.
When requesting an extension, heirs must contact the servicer and provide documentation, such as a letter of hardship that details their intentions to repay the loan, a real estate listing, proof that they’re trying to obtain financing to keep the house, or probate documents, for example, LaRose says.
The servicer will then take those documents to HUD, which can grant the servicer an extension.
However, keep in mind that heirs will only have a maximum of one year from the date the borrower died to repay the loan, LaRose says.
How to Prepare for a Smooth Payoff
Planning ahead is key. To prepare for a smooth payoff, borrowers should strongly consider granting powers of attorney and naming the executor of the estate in their will.
This will make it much easier for the servicer to contact the appropriate heir or heirs when the reverse mortgage becomes due and payable.
“The smoothest transactions are ones where there has been proper planning in place — where the borrowers planned ahead of time and have all the wills and documentation in place before they pass away.
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