How to Pay Off a Reverse Mortgage

A reverse mortgage is a type of loan designed for homeowners, typically aged 62 and older, that allows them to convert a portion of their home equity into cash without the requirement of making monthly mortgage payments. Unlike a traditional mortgage where you make payments to the lender, a reverse mortgage involves the lender paying you, either as a lump sum, a line of credit, or regular disbursements. It is still a loan that must be repaid under specific conditions. This article explains the various circumstances that trigger the repayment of a reverse mortgage and the available options for satisfying the loan.

Scenarios Triggering Repayment

A reverse mortgage loan becomes due and payable when certain events occur, referred to as “triggering events.” One common trigger for repayment is the passing of the last surviving borrower on the loan. Upon the borrower’s death, the loan balance becomes due, and the heirs or estate are responsible for addressing the repayment.

Another scenario that causes a reverse mortgage to become due is the sale of the home by the borrower. Similarly, the loan becomes due if the home is no longer the borrower’s principal residence. This condition is generally met if the borrower permanently moves out, for example, by relocating to another residence or a long-term care facility, often defined as being away from the home for 12 consecutive months.

Failure to meet the ongoing obligations of the reverse mortgage can also trigger its repayment. Borrowers are required to maintain the property in good condition, pay property taxes, and keep homeowner’s insurance current. Non-compliance with these terms, such as neglecting property taxes or insurance premiums, can lead to the loan becoming due and potentially result in foreclosure.

Options for Satisfying the Loan

Once a reverse mortgage becomes due and payable, several methods are available to satisfy the loan. A common approach is to sell the property. The proceeds from the sale are then used to pay off the reverse mortgage balance, and any remaining equity after the loan is satisfied belongs to the borrower or their estate. Federally backed Home Equity Conversion Mortgages (HECMs) are non-recourse loans, meaning the borrower or their heirs are not personally liable for any loan balance that exceeds the home’s value if the sale proceeds are insufficient to cover the debt.

Another option, particularly for heirs who wish to retain the property, is to refinance the reverse mortgage into a new, traditional mortgage. This requires the individual to qualify for a conventional loan based on their income, credit score, and current interest rates, and they would then begin making regular monthly mortgage payments. Alternatively, the loan can be satisfied by paying off the balance using other financial resources, such as personal savings, inheritance funds, or other assets.

For heirs of a federally backed HECM who want to keep the home, a specific provision known as the 95% rule applies. This rule allows heirs to pay off the loan at 95% of the home’s current appraised value or the full loan balance, whichever amount is less. If none of these options are pursued, or if the borrower or heirs decide not to keep the property, they can execute a deed in lieu of foreclosure, which transfers ownership of the property directly to the lender to satisfy the debt. This avoids the formal foreclosure process but results in the loss of the property.

The Repayment Process

The initial step is to contact the loan servicer to inform them of the triggering event and discuss the chosen method of repayment.

Following this initial contact, a formal request for a payoff statement is necessary. This request must typically be submitted in writing and include specific details such as the property address, the borrower’s name, and an anticipated payoff date. If a third party, such as an heir or attorney, is making the request, proper authorization documentation is generally required to receive case-specific information.

Upon receiving the payoff statement, carefully review its contents, which will detail the total loan balance, including accrued interest, and any associated fees. Pay close attention to the “good-through” date on the statement, as the payoff amount is only valid until that date; a new statement will be needed if the repayment is delayed beyond this period. Once the exact payoff amount is confirmed, arrangements must be made for the transfer of funds. For federally held HECMs, payments typically must be made with certified funds, such as a cashier’s check.

After the full loan amount has been successfully transferred and processed, ensure that the lien on the property is officially released. The lender is responsible for providing documentation confirming that the reverse mortgage has been satisfied. This lien release document should then be recorded with the appropriate local government office to formally clear the title of the property. While the loan becomes due immediately upon a triggering event, heirs typically have a grace period, often around six months, to satisfy the debt, with potential for extensions if they are actively working towards repayment.