Homeowners 62 and older may opt to use a reverse mortgage to help fund their retirement. Reverse mortgages provide money to borrowers and don’t require repayment until the borrower sells the home or stops living in it. Most reverse mortgages are backed by the U.S. Department of Housing and Urban Development. These loans are called Home Equity Conversion Mortgages, or HECMs.
When Do You Have to Pay Back a Reverse Mortgage?
You have to pay back a reverse mortgage when you sell the property or move out. When you die, your estate must pay back the reverse mortgage unless your spouse or another co-borrower is still using the home as a primary residence.
A reverse mortgage also comes due if you don’t stay current with your property taxes or homeowners insurance payments, or if you don’t maintain the home in good condition. However, servicers will usually allow you to correct the problem rather than immediately force a sale.
How Much Time Do You Get to Pay Back a Reverse Mortgage?
Contact your loan servicer immediately if an event occurs that causes the reverse mortgage to become due. The servicer will generally give you time to sell the home or find another way to repay the reverse mortgage — six months to a year in most cases.
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Paying Off a Reverse Mortgage Early
A reverse mortgage is more beneficial financially the longer you keep it, so it usually doesn’t make sense to take one out if you don’t plan to stick with it for the long-term. But there are some reasons you might decide to get out of a reverse mortgage early.
“Usually it’s from an inheritance standpoint,” says Michele Albohn, certified reverse mortgage specialist at Compass Mortgage. “The kids want a house, somebody decides they need to live there, or maybe they have an adult disabled child that’s going to need to live in the home and they want to make sure that that child always has some place to live.”
Other reasons you might want to get out of a reverse mortgage are to downsize, go into assisted living or move closer to family. Or, you might want to stop living in your home so you can rent it out.
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7 Ways to Pay Off a Reverse Mortgage
Whether you took out a reverse mortgage yourself or inherited a house with one, there are several routes you can take to pay it off.
Sell the Home
One way to get out of a reverse mortgage is to simply sell the home.
“It gets paid off like any other mortgage. [The seller will] still get the proceeds and they can go on and purchase the next home,” Albohn says.
For example, if your home is worth $400,000 and you owe $150,000 on a reverse mortgage, selling the home could pay off the reverse mortgage and leave you with $250,000. Of course, selling is only a good option if you don’t want to hold onto the home for yourself or another family member.
Pay It Off With Savings
You could use savings or sell assets to pay off your reverse mortgage. This allows you to keep the home. You’ll just need to consider whether it’s worthwhile to give up any returns you’re getting on those assets to get out of the reverse mortgage.
Get a Loan
If your reverse mortgage balance is relatively low, you could pay it off by taking out a loan. Some lenders offer personal loans up to $100,000, although the interest rate will typically be higher than with a loan secured by home equity. You could then rent out the property and use the rental income to pay off the personal loan.
Refinance Out of the Reverse Mortgage
Another way to get out of a reverse mortgage while keeping your home is to refinance with a traditional “forward” mortgage. In this scenario you pay off the reverse mortgage balance with the new mortgage, then make monthly payments on the new loan.
Take Out a New Mortgage
Reverse home loans aren’t assumable, so if heirs want to keep a house with a reverse mortgage or if the borrower wants to give the house to someone else, the new occupants need to take out their own mortgage.
Borrow Against Other Home Equity
The borrower or their heirs can also draw on home equity from another property they own to pay the reverse mortgage balance.
Give the Lender a Deed in Lieu of Foreclosure
If you’ve inherited a home with a reverse mortgage balance that exceeds the property value, you can turn the property over to the lender without financial penalty or damage to your credit. Reverse mortgages are non-recourse loans, meaning that lenders don’t have a claim on any assets in the borrower’s estate except the home itself.
The lender will tell you how to proceed with a deed in lieu of foreclosure. This allows you to voluntarily sign over the property to the lender so you’re not liable for the debt. You’ll need to clean out the home and complete some paperwork.
“It can be as simple as once the home is clear of personal belongings, it’s just an inspection where they walk through, validate that the property’s in good condition and then they can send them the documents to do that. And if that’s the decision that’s best for the family, that’s a fairly straightforward process,” says Michael Merritt, senior vice president of default and customer care at BOK Financial.
If the lender participates in HUD’s Cash-for-Keys program, you might even receive compensation for completing the deed in lieu of foreclosure promptly. Lenders may offer up to $7,500 to heirs who give a deed in lieu of foreclosure, plus another $5,000 toward probate costs.
Ask the Lender for Guidance
If you’re unsure of the home’s value or the borrower’s estate is tied up in probate, you might be tempted to do nothing and let the home go into foreclosure. That won’t have any negative repercussions on your credit. However, it’s still better to contact the lender and inform them of the situation.
When you reach out to the lender, you could learn that you’re entitled to some equity in the home, or that you’re eligible for financial incentives to give a deed in lieu of foreclosure. Working with the lender can also help the estate avoid unnecessary paperwork.
“It’s always easier to do it in a kind of partnership,” Merritt says.
What Is Reverse Mortgage Foreclosure?
Reverse mortgage foreclosure can happen if the lender has to take the home or force a sale because the borrower is no longer complying with the mortgage terms. Failing to pay property taxes or homeowners insurance, or letting the home fall into disrepair can trigger foreclosure. Lenders can also foreclose on a reverse mortgage if the borrower has passed away or moved out.
What Happens to a Non-Borrowing Spouse if a Reverse Mortgage Borrower Dies?
Borrowers often leave a spouse off their reverse mortgage application because the spouse is under age 62 or because they want to qualify for a higher principal limit. (The maximum loan amount is based on the age of the youngest borrower.)
A non-borrowing surviving spouse can generally continue to live in a home with a reverse mortgage that’s backed by HUD and issued after August 4, 2014. The surviving spouse must continue to live in the home, pay its taxes and insurance and keep the property in good repair.
Can You Get Out of a Reverse Mortgage if You Have Second Thoughts?
Reverse mortgages have a right of rescission, which means they are recorded three business days after you sign the closing documents. To cancel, you must notify the lender in writing during the rescission period. After three business days, you can only get out of a reverse mortgage by paying off what you owe. If you haven’t used the loan proceeds, this shouldn’t be difficult.
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How to Pay Back a Reverse Mortgage originally appeared on usnews.com
