What happens at the end of a reverse mortgage?

A reverse mortgage is a useful financial tool for retirees looking to supplement their retirement income. It allows you to leverage the equity in your home without selling your home, which can help you secure funds for your golden years without adding an extra payment. However, a reverse mortgage is still a loan- and loans eventually fall due. So, what happens when a reverse mortgage ends?

A reverse mortgage ends when the last surviving homeowner dies, sells the home, or moves from the primary residence to a retirement or nursing home. When any of these events occur, the reverse mortgage will fall due, and the lender will inform the executor of the due balance and allow them time to decide what to do. Generally, when a reverse mortgage falls due, you have 180 days to repay the loan.

How do reverse mortgages end?

A reverse mortgage ends when one of the following conditions is met:

You sell the home

If you decide to move out of your home permanently or sell it, the reverse mortgage will fall due, and you must start making loan repayments.

You no longer use the home as your primary residence

Reverse mortgages are designed for homeowners who live in their homes. If you move into a nursing home or relocate for an extended period, usually over 12 months, the loan will fall due.

You pass away

When the last borrower on the loan passes away, the loan becomes due. The heirs may have several options, including selling the home and using the proceeds from the sale to pay the loan, refinancing the reverse mortgage into a traditional mortgage, or signing over the property title to the lender.

The loan expires

Though rare, some reverse mortgages have a set loan term, typically 10 to 15 years. When the term ends, the loan becomes due regardless of other circumstances. Refinancing may be an option.

You default on obligations

Part of your responsibility when taking a reverse mortgage is ensuring the tax and insurance obligations, alongside upkeep, are kept current. The lender can terminate the reverse mortgage early, and demand loan payment if they feel this isn’t being done.

What happens when a reverse mortgage ends?

When a homeowner with a reverse mortgage passes away or otherwise ends the loan, the loan becomes due. The lender will contact the executor of the reverse mortgage to inform them that the loan is now due, and provide information on the balance and options for repayment.

Heirs typically have up to six months to repay the reverse mortgage. If more time is needed, they can always request an extension. If the heirs are happy to sell the home to cover the loan, they can work with a local real estate agent to find a buyer. Either way, the proceeds will be used to settle the loan.

What happens to the surviving spouse when one spouse dies?

If one party to the reverse mortgage passes away, but their spouse was listed as a co-borrower, the reverse mortgage will continue uninterrupted. The loan will only fall due when the final borrower passes away or otherwise ends the agreement.

If the surviving spouse was not listed as a co-borrower, and you entered the loan after August 2014, there’s no need for concern. The surviving spouse’s rights are protected under the Federal Housing Administration (FHA), known as ‘eligible non-borrowing spouse’ protections. This allows them to remain in the home and receive the reverse mortgage payments even after the loan signer passes away. However, they must be over 62 themselves at the time. Younger spouses, regrettably, cannot ‘inherit’ the reverse mortgage this way.

Your surviving spouse must be willing and able to maintain the terms of the reverse mortgage- maintaining the home, servicing its taxes/insurance, and using it as their primary residence. Otherwise, the loan will fall due.

How to pay the reverse mortgage

When the reverse mortgage term ends, either due to death, vacating the primary residence for at least 12 months, or selling the home, the loan will fall due. When the home is sold, the mortgage balance will be paid off using the proceeds from the sale, and any remainder is paid to your estate or heirs. For example, if the reverse mortgage balance is $200,000, and you sold the property for $300,000, you should pay off the loan in full, and keep the remaining $100,000.

If the property is valued lower than it was at the time the mortgage was taken, you won’t be required to top up the extra amount. A reverse mortgage includes a non-recourse clause to protect homeowners from paying off an inflated loan. Instead, the home can be sold for at least 95% of its current appraised value, and that amount should be paid to the reverse mortgage lender. The remainder of the outstanding balance will be covered by the insurance protection you took out as part of the loan.

If the heirs wish to keep the home, they will be required to pay the reverse mortgage. They can also choose to refinance the reverse mortgage into a traditional mortgage to help preserve the equity in your home. However, taking up a mortgage means that they will need to make monthly mortgage payments on the new loan.

Additionally, some lenders may allow for a ‘deed in lieu’ arrangement. This involves signing the deed for the property over to the mortgage lender instead of concluding the sale/payment cycle yourself. However, lenders don’t like this agreement much, as it leaves them stuck with property instead of liquid cash to cover the loan, but it is always an option you can explore.