How to Get Out of a Reverse Mortgage

A reverse mortgage allows homeowners, typically those aged 62 or older, to convert a portion of their home equity into cash. Unlike a traditional mortgage, a reverse mortgage does not require monthly mortgage payments to the lender. Instead, the loan balance grows over time as interest accrues and funds are disbursed. The loan generally becomes due and payable when the last borrower passes away, sells the home, or permanently moves out.

Voluntary Loan Repayment

Before making any decisions, it is important to gather critical information, including the current reverse mortgage loan balance, which encompasses the principal, accrued interest, mortgage insurance premiums, and servicing fees. Obtaining an updated market value of your home is also essential for informed planning.

One common method for voluntary repayment is selling the home. This requires obtaining a professional home appraisal to determine its current market value. Home sellers typically incur costs such as real estate agent commissions and other closing costs. The sale proceeds are then used to pay off the reverse mortgage, with any remaining equity going to the homeowner.

Another option involves refinancing the reverse mortgage with a traditional mortgage. This requires evaluating your eligibility for a new loan, considering factors such as your credit score, income, and debt-to-income ratio. The new conventional mortgage is then used to pay off the reverse mortgage balance, establishing a new repayment schedule with monthly principal and interest payments. Lenders may require the property to be your primary residence and for you to demonstrate financial capability to maintain property taxes and insurance.

Alternatively, you can pay off the reverse mortgage using other available funds. This might involve utilizing savings, an inheritance, or gifts from family members. To proceed with this option, you must contact your reverse mortgage servicer to request a payoff statement, which details the exact amount needed to satisfy the loan. Once the payoff amount is confirmed, a lump-sum payment can be submitted to fully discharge the reverse mortgage.

Loan Due and Payable Events

A reverse mortgage becomes due and payable. One such event is the death of the last surviving borrower on the loan. Heirs typically receive a “Due and Payable” notice from the lender within 30 days of notification, providing them with a six-month timeframe to address the loan.

The non-recourse feature of most reverse mortgages protects heirs. This means heirs are not personally liable for the debt beyond the home’s value. If the loan balance exceeds the home’s appraised value, heirs are generally not required to pay the difference. They can choose to keep the home by paying off the loan balance or 95% of the appraised value, whichever is less.

Heirs have several options within the six-month period. They can sell the home, using the proceeds to satisfy the reverse mortgage, keeping any remaining equity. The process of selling is similar to a voluntary sale, involving appraisals and closing costs. If heirs wish to retain the home, they can pay off the reverse mortgage balance using personal funds or by obtaining a new traditional mortgage in their name.

Another due and payable event occurs if the borrower permanently moves out of the home. This is typically defined as being absent for more than 12 consecutive months for medical reasons or more than six months for non-medical reasons. The borrower is expected to notify the lender of such a permanent move. Upon a permanent move, the loan becomes due, and the borrower must repay it. The options for repayment are the same as those for voluntary repayment: selling the home, refinancing with a traditional mortgage, or paying off the loan with other financial resources.

Addressing Default Situations

A reverse mortgage can enter default. Common default conditions include failing to pay property taxes, homeowner’s insurance premiums, or not maintaining the home in good repair. Another default trigger is if the home ceases to be the borrower’s primary residence for required periods, such as being away for an extended time.

When a default occurs, the lender typically issues a notice of intent to accelerate the loan or a “Due and Payable” letter. This notification informs the borrower of the default and provides a cure period to remedy the situation. The initial cure period may be around 30 days, but borrowers often have up to six months to resolve the issue.

To cure a default, the borrower must take specific steps, such as paying overdue property taxes or insurance, or undertaking necessary home repairs. If the default is related to occupancy, the borrower may need to re-establish the home as their primary residence. Communication with the servicer is important during this period to understand the requirements for resolution.

If the default is not cured within the specified timeframe, the loan becomes due and payable, and the lender can initiate foreclosure proceedings. While foreclosure is a last resort, it allows the lender to recover the outstanding loan balance. During this stage, options remain, such as urgently selling the home to pay off the loan before foreclosure is finalized or seeking housing counseling to explore potential solutions.