In the past two years, there has been much favorable press around reverse mortgages both from high profile news sources (Wall Street Journal, NYT, Forbes, Bloomberg) and Ph.D. academics discussing a reverse mortgage as a wealth management tool. You can find these articles on our Facebook page. Despite the coverage, there is a lot of confusion around what happens at the end of a reverse mortgage. We're frequently asked the following...
What happens to a reverse mortgage after the borrower dies?
Can a reverse mortgage go into foreclosure?
How do you pay back a reverse mortgage?
When is a reverse mortgage due?
A reverse mortgage, also known as a home equity conversion mortgage or a HECM, does not have to be held until the borrower dies, it can be paid back at any time. There are no prepayment penalties or back-end hidden fees. Each month, the borrower will receive a monthly statement that is sent by a company called a loan servicer. The servicer may or may not be a division of the lender who made the reverse mortgage. An example of a reverse mortgage statement is shown below.
The monthly statement always shows the Current Outstanding Loan Balance. The balance owed equals the total sum of the loan proceeds advanced to the borrower, plus interest and other unpaid fees, such as mortgage insurance. Interest, mortgage insurance premiums, property taxes, and hazard insurance will continue to accrue until the loan is paid and settled. This means the loan balance will continue to grow during the settlement process.
Steps to Pay Off a HECM
The timeline for settling a reverse mortgage includes these major milestones.
The bank does not want the house in foreclosure; nor does the federal government, who is insuring the reverse mortgage. Banks are in business to do three things: 1) loan money, 2) collect interest, and 3) get their money back. Remember too that the bank does not get title to the home. They have a lien on title, which means if the house is sold, they get paid back first, but they do not own the house. This works the same as if the person had a conventional loan, like the one they probably had when they first bought the home.
The reason banks do not want to foreclose on reverse mortgage borrowers is because it is expensive, time consuming, and they have reputation risk – the kind of exposure they don’t want. That said, there are federal regulations (HUD and FHA) that require them to foreclose if certain deadlines aren’t met.
It is important to know that servicers have many tools to monitor death records. Sometimes people ask: “What if we don’t tell them the borrower died, can we still keep the house a while longer?” The answer is no. The servicer subscribes to different proprietary databases that alert them when someone has passed away, including the Social Security death index.
Maturity Event (Day 0)
A reverse mortgage must be repaid when a ‘Maturity Event’ occurs. Any of the following would be considered a maturity event, making the reverse mortgage due and payable:
- Sale of the home
- Borrower conveys title to someone else
- Last borrower passes away
- Borrower resides outside home for more than 12 months due to physical or mental illness
- Property charges are not paid on time
- Home falls into disrepair and is not fixed
Once a maturity event has occurred, not additional funds can be taken from the reverse mortgage.
Lender Sends Due and Payable / Demand Letter (within 30 days of the Maturity Event)
Within 30 days of being notified of a maturity event, the loan servicer will mail a condolence, Due and Payable letter (also known as a Demand letter), to the borrower, or borrower’s estate, that discloses the current loan balance and explains options for paying back the outstanding balance.
The clock starts when the maturity event occurs, not when the bank servicer is notified.
Heirs should be proactive and notify the servicer as soon as a maturity event occurs. Admittedly, heirs are often consumed with other duties, not to mention emotional distress, but the equity remaining in the home is their asset and they should be proactive in protecting it.
The loan servicer will also order an appraisal during this time frame to determine the property’s current market value. The estate must be prepared for this because the appraiser will need access to the property to complete their inspection and take pictures. Owners of the property can pay off the reverse mortgage by paying the lesser of: 1) the full amount owed on the loan, or 2) 95% of the current appraised value of the property.
Borrower Sends Intent to Satisfy Document (within 30 days of the Demand Letter)
Heirs must respond to the Due and Payable letter within 30 days and return a written ‘Intent to Satisfy the Loan’ document. The borrower or heirs have several ways they can pay off a reverse mortgage. They can pay the balance with their own funds, they can take out a new mortgage to pay it off, or they can sell the property. Sometimes, when parents pass away, the heirs want to keep the property in the family or they may want to retain it as rental property. They can get their own financing and pay off the reverse mortgage balance and then they’re free to do what they want.
Home Listed for Sale and Extensions (6-12 months overall)
Payment of the reverse mortgage is due immediately once a maturity event has occurred. However, the estate may have up to 6 months to satisfy the debt. If the owners provide the servicer with evidence demonstrating the active marketing of the property (including documentation related to delays in sales or payoffs) or attempts to satisfy the mortgage balance, owners may request from HUD no more than two 90-day extensions.
The borrowers or heirs must contact the servicer to request these 90-day extensions and they may require specific documentation that has to be submitted to HUD. For example, if the property is listed for sale, HUD would require a copy of the real estate listing agreement.
When the home sells, if the loan balance is less than the market value of the home when sold, the additional equity is retained by the owners or heirs. If the home is worth less than the balance of the loan, the owners and/or heirs are not responsible for the shortfall.
If the initial Due and Payable letter, also called a “Demand Letter,” is not responded to, or if the 90-day extensions have expired and the property still has not sold, the borrower has no heirs to help pay off the loan, or the loan is not otherwise satisfied, then the Servicer may be required to initiate foreclosure.
Pre-foreclosure notices will be mailed to the borrower’s home address by the Loan Servicer or a foreclosure attorney. A foreclosure attorney must take First Legal Action to initiate foreclosure within 6 months of the “due and payable” date, unless prior time extensions have been approved by HUD.
You or your heirs may receive these foreclosure notices, even if you are actively working to refinance the property or sell it to pay off the loan. In some cases, state law may require these notices be sent. Don’t let this worry you. You should, however, contact the Loan Servicer and make them aware that you have received these letters and ask them for further instructions.
If a foreclosure does occur, the borrower has not more responsibility for the home or the loan. However, the borrower will not receive any remaining proceeds after the loan balance is satisfied. If there was equity in the property and it went to foreclosure, that equity is lost. That is why it is so important to communicate early and often with the loan servicer.
Much of the information above was summarized from a recent publication from the National Reverse Mortgage Lenders Association, NRMLA, in Washington, D.C. If you would like a copy of this well-written guide, click the When My Loan Is Due button below.
We are introduced to most of our reverse mortgage clients by financial advisors, elder law and estate planning attorneys, tax professionals, and past clients. We see our role as financial educators, not sales people. If you would to discuss ways to increase your income in retirement, click the free consultation button below.