Can You Walk Away From a Reverse Mortgage?

A reverse mortgage allows homeowners to convert a portion of their home equity into cash without incurring monthly mortgage payments. Unlike a traditional mortgage, borrowers do not make regular payments to the lender. Many reverse mortgages, especially Home Equity Conversion Mortgages (HECMs), are non-recourse loans. This means the borrower or their estate cannot owe more than the home’s value when the loan becomes due and the property is sold. The loan balance, including accrued interest and fees, becomes payable under specific circumstances, offering various options for the borrower or their heirs.

When a Reverse Mortgage Becomes Due

A reverse mortgage loan does not have a fixed repayment date. Instead, it becomes due and payable upon certain events, known as maturity events.

One event is the death of the last surviving borrower or eligible non-borrowing spouse. In this situation, the loan balance, including all disbursed funds, accrued interest, and fees, must be repaid. The lender will send a due and payable notice to the estate.

The loan also becomes due if the borrower permanently moves out of the home. This includes selling the home, transferring the title, or residing outside the home for over 12 consecutive months, such as moving to a long-term care facility. The property must remain the borrower’s primary residence.

Another trigger for the loan becoming due is failure to meet the loan agreement terms. Borrowers must pay property taxes, maintain homeowner’s insurance, and keep the home in good repair. Neglecting these responsibilities can lead to default, making the loan balance immediately due.

Options When the Loan is Due

When a reverse mortgage loan becomes due, several options are available to satisfy the debt, particularly for heirs if the borrower has passed away. The non-recourse nature of most reverse mortgages ensures that the borrower or their estate will never owe more than the home’s value. This means personal assets beyond the home are generally protected from collection efforts. For HECMs, which are federally insured, the Federal Housing Administration (FHA) covers any shortfall if the home’s sale price is less than the loan balance.

If the loan becomes due upon the borrower’s death, heirs typically have several choices. They can choose to repay the loan balance and keep the home. This repayment amount is capped at either the full loan balance or 95% of the home’s appraised value, whichever is less. Heirs might secure a new traditional mortgage to pay off the reverse mortgage and retain ownership of the property.

Alternatively, heirs can sell the home to repay the reverse mortgage. Any proceeds from the sale exceeding the amount owed on the loan belong to the estate and subsequently to the heirs. If the home sells for less than the total loan balance, the heirs are not personally responsible for the difference. The FHA mortgage insurance covers the deficit.

Should the heirs not wish to repay the loan or sell the home, they can opt to provide a deed in lieu of foreclosure or allow the lender to foreclose. In a deed in lieu, the heirs voluntarily transfer the property’s title to the lender to satisfy the debt, avoiding the foreclosure process. Allowing foreclosure means the lender will take legal action to reclaim the property. Even in foreclosure, the non-recourse provision applies.

If the borrower is still living but moves out permanently, they must also repay the loan. This typically involves selling the home and using the proceeds to satisfy the debt, or refinancing the reverse mortgage into a traditional mortgage. The non-recourse protection still applies; if the sale proceeds are insufficient to cover the loan, the borrower is not personally responsible for the difference.

Ongoing Homeowner Obligations

While a reverse mortgage eliminates the need for monthly mortgage payments, borrowers retain ongoing responsibilities related to their home. These obligations are important for maintaining the loan in good standing and avoiding default. Failure to meet these requirements can lead to the loan becoming due and potentially result in foreclosure.

Borrowers must ensure that all property taxes are paid on time. Non-payment can trigger a loan default. Similarly, maintaining adequate homeowner’s insurance is a mandatory requirement. A lapse in coverage can also lead to the loan being called due.

The homeowner is also responsible for keeping the property in good repair. Neglecting necessary repairs and allowing the property to fall into disrepair can be considered a violation of the loan agreement.

Finally, the home must remain the borrower’s primary residence. If the borrower moves out permanently, the loan becomes due and payable. Lenders may verify occupancy annually to ensure this condition is met.