What Happens at the End of a Reverse Mortgage?

A reverse mortgage is a financial product allowing homeowners, typically those aged 62 and older, to convert a portion of their home equity into cash. Unlike a traditional mortgage, borrowers do not make monthly mortgage payments. Instead, the loan balance grows over time with accrued interest and fees, with repayment generally deferred until a specific event occurs.

When a Reverse Mortgage Becomes Due

A reverse mortgage loan does not have a fixed maturity date like a traditional loan; rather, it becomes due and payable upon the occurrence of certain “maturity events.” One common trigger is the death of the last surviving borrower, or the last eligible non-borrowing spouse if one was included in the loan agreement.

Another event that can cause the loan to mature is the sale of the home by the borrower. When the property is sold, the reverse mortgage balance is typically repaid from the proceeds of the sale. Similarly, if the borrower permanently moves out of the home, it triggers the loan to become due. This includes moving to another residence or long-term care, defined as no longer occupying the home as the primary residence for a continuous period.

The loan can also become due if the borrower fails to meet specific ongoing obligations outlined in the loan terms. Common examples include failing to pay property taxes, neglecting to maintain homeowners insurance, or allowing the property to fall into significant disrepair. These breaches can lead to the lender calling the loan due.

Options for Repaying the Loan

Once a reverse mortgage becomes due, several options are available for satisfying the loan.

• Repay the Loan: One approach is to repay the full loan amount. This allows the heirs to retain ownership of the home. For federally insured Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage, heirs have the option to repay the lesser of the outstanding loan balance or 95% of the home’s appraised value if they wish to keep the property.
• Sell the Home: Another common method for repayment is selling the home. The property is put on the market, and the proceeds from the sale are used to satisfy the reverse mortgage loan.
• Deed in Lieu of Foreclosure: In situations where the heirs do not wish to repay the loan or sell the home, a deed in lieu of foreclosure may be an option. This process involves voluntarily transferring the property’s deed back to the lender to satisfy the debt. This is typically considered when the home’s value is less than the loan balance, and the heirs prefer not to engage in the sale or repayment process.
• Foreclosure: If none of the above options are pursued, or if the loan terms are breached and not cured, the lender may initiate foreclosure proceedings. This is a legal process where the lender takes possession of the home to sell it and recover the outstanding loan amount. While it is a last resort, lenders are legally entitled to pursue foreclosure if the loan is not satisfied through other means after it becomes due.

Understanding the Financial Outcome

A primary feature of reverse mortgages, particularly federally insured HECMs, is their non-recourse nature. This means that the borrower or their heirs will not be personally responsible for any loan balance that exceeds the home’s value. The lender’s recovery is limited to the value of the home itself, protecting other assets of the borrower or their estate. Specifically, for HECMs, the maximum amount owed by the borrower or heirs is the lesser of the outstanding loan balance or 95% of the home’s appraised value.

If the home’s value at the time the loan becomes due is greater than the outstanding reverse mortgage balance, the remaining equity belongs to the borrower or their estate and heirs after the loan is satisfied. This allows families to potentially benefit from any appreciation in the property’s value. The non-recourse feature ensures that this remaining equity is preserved for the heirs.

Conversely, if the home’s value is less than the outstanding loan balance when the loan becomes due, the non-recourse provision protects the heirs from personal liability for the shortfall. The Federal Housing Administration’s (FHA) mortgage insurance, which is a component of HECMs, covers this difference for the lender, providing a safeguard against market fluctuations.