How Can a Reverse Mortgage Be Reversed?
Understand all the pathways to end a reverse mortgage, whether by choice or specific conditions, and what happens when the loan becomes due.
A reverse mortgage allows homeowners, typically those aged 62 and older, to convert a portion of their home equity into accessible funds. Unlike a traditional mortgage where a borrower makes monthly payments, a reverse mortgage involves the lender disbursing payments to the borrower as a lump sum, line of credit, or monthly installments. The loan balance grows over time with accrued interest and fees. Homeowners often seek to understand how this loan can be ended.
Initial Cancellation Rights
Federal law provides borrowers with a limited opportunity to cancel a reverse mortgage agreement. This is known as the right of rescission, a three-business-day cooling-off period. The three-day period begins once the contract is signed and the borrower receives TILA disclosures and two copies of the notice explaining their right to rescind. Saturdays count as a business day, but Sundays and legal public holidays do not.
To exercise this right, the borrower must notify the lender in writing within this timeframe. Sending the cancellation notice by certified mail, with a return receipt requested, provides proof of timely delivery. Upon valid cancellation, the security interest in the home becomes void, and the lender has 20 days to return any money paid and release the lien. The borrower must then offer to return any funds or property received from the lender.
Voluntary Repayment and Payoff
Beyond the initial cancellation period, a reverse mortgage can be ended by the borrower or their heirs at any point. This involves paying off the entire loan balance, including principal, accumulated interest, mortgage insurance premiums, and service fees. Reverse mortgages, particularly Home Equity Conversion Mortgages (HECMs), do not typically carry prepayment penalties.
To initiate a payoff, the borrower or their representative must request a payoff statement from the loan servicer. This request typically requires providing the FHA case number, property address, borrower’s name, and anticipated payoff date. The payoff statement details the exact amount due to satisfy the loan. Once this amount is paid, the lien on the property is released, and the homeowner or their estate retains any remaining equity.
Conditions for Loan Becoming Due
A reverse mortgage becomes due and payable under specific circumstances outlined in the loan agreement. The most common trigger is the death of the last surviving borrower on the loan. The loan also becomes due if the home is sold or title is transferred.
Another condition is if the property ceases to be the principal residence. This includes situations where the borrower permanently moves out, such as into an assisted living facility or with family, typically for over 12 consecutive months. Borrowers are also required to meet ongoing loan obligations such as paying property taxes, maintaining homeowners insurance, and keeping the property in good repair. Failure to fulfill these responsibilities can cause the loan to become due and payable.
Addressing a Due and Payable Loan
Once a reverse mortgage becomes due and payable, the lender typically sends a “Due and Payable” notice, informing the borrower or their heirs of the outstanding balance. Heirs generally have a timeframe, often around 30 days from notification, to decide on a course of action, with up to six months to repay the loan. Extensions, typically in 90-day increments, may be granted if heirs can demonstrate active efforts to resolve the debt, such as listing the home for sale.
Several options are available to address a due and payable reverse mortgage. The most common approach is to sell the home and use the proceeds to satisfy the loan balance. If heirs wish to keep the property, they can repay the loan in full using other funds or by refinancing it into a traditional mortgage, if they qualify.
Most HECM reverse mortgages are non-recourse loans, meaning heirs are not personally liable for the debt. If the loan balance exceeds the home’s value, heirs typically will not owe more than the home’s appraised value or 95% of its appraised value, whichever is less. In situations where repayment is not feasible or desired, the heirs can also offer a deed in lieu of foreclosure, transferring the property to the lender to satisfy the debt.