What Happens When a Reverse Mortgage Runs Out?
What happens when a reverse mortgage ends? Get clear answers on next steps, options, and financial safeguards for borrowers and heirs.
A reverse mortgage is a financial tool allowing homeowners aged 62 or older to convert a portion of their home equity into cash. This loan generally does not require monthly payments to the lender. Instead, the loan balance, which includes principal, accrued interest, and fees, grows over time. Its primary purpose is to provide financial flexibility, enabling access to home value without selling it. Repayment is typically deferred until specific conditions, known as maturity events, are met.
When a Reverse Mortgage Becomes Due and Payable
A reverse mortgage becomes due and payable when certain “maturity events” occur. The most common trigger is the death of the last surviving borrower, or the last eligible non-borrowing spouse. Upon this event, the full loan balance becomes due.
The loan also becomes due if the home ceases to be the borrower’s primary residence. This includes permanently moving out, such as relocating to a long-term care facility, or living elsewhere for more than 12 consecutive months. The loan also becomes due if the borrower sells the home.
Failure to pay property taxes or homeowner’s insurance premiums can cause the loan to become due and payable. Neglecting to maintain the home, allowing it to fall into significant disrepair, can also trigger the loan’s maturity. These conditions ensure the property retains its value as collateral for the loan.
Borrower and Heir Obligations and Options
Once a reverse mortgage becomes due and payable, the lender typically issues a “Due and Payable” letter. This notification is sent to the borrower, or their estate and heirs, usually within 30 days of the lender being informed of the triggering event. This letter outlines the loan balance and the available options for satisfying the debt.
The borrower, or their heirs, have several options to address the outstanding loan balance. One choice is to repay the loan in full, either using personal funds or by refinancing the property with a new, traditional mortgage. If heirs wish to keep the home, they can pay off the loan balance or 95% of the home’s appraised value, whichever amount is less.
Alternatively, the home can be sold, with the proceeds used to satisfy the reverse mortgage. Lenders typically provide about six months to complete the sale after the loan becomes due. If more time is needed, extensions may be requested, provided there is demonstrated effort, such as listing the home for sale. Any remaining equity after the loan is paid off belongs to the borrower or their heirs.
If the loan is not repaid or the home is not sold within the specified timelines, the lender may initiate foreclosure proceedings. In situations where keeping or selling the home is not feasible, the borrower or heirs may consider a deed in lieu of foreclosure, transferring the property’s title directly to the lender to satisfy the debt and avoid the formal foreclosure process.
The Non-Recourse Protection
Most reverse mortgages, particularly Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration (FHA), are non-recourse. This means the borrower or their heirs will never owe more than the value of the home at the time of sale, regardless of the outstanding loan balance. This protection prevents lenders from pursuing other assets to cover any shortfall if the loan balance exceeds the home’s market value.
This non-recourse provision provides a substantial safeguard for borrowers and their families. If the home’s sale price is less than the amount owed on the reverse mortgage, the lender absorbs the loss. For FHA-insured HECMs, the FHA’s Mutual Mortgage Insurance Fund covers this difference, ensuring the lender is reimbursed while protecting the borrower from personal liability.
If the home sells for less than the loan balance, the borrower or heirs are not responsible for the deficit. Conversely, if the home sells for more than the loan balance, the excess equity belongs to the borrower or their estate. This protection extends to heirs, allowing them to either purchase the home for 95% of its appraised value or the loan balance (whichever is less) if they wish to keep it, or simply walk away without personal financial obligation for any shortfall. The non-recourse feature is a fundamental consumer protection that distinguishes reverse mortgages from many other loan types.