Among many other benefits, reverse mortgages offer convenient terms of repayment. Unlike regular home mortgages, reverse mortgages do not require monthly mortgage payments during the term of the loan itself. As long as you stay on top of responsibilities such as paying property taxes, homeowner’s insurance, and maintenance expenses, you will never be mandated to make any payments on the loan balance during the course of your reverse mortgage. So, when will you have to pay back the loan? Let’s find out in the sections below. Keep in mind that the following descriptions are intended specifically for borrowers of Home Equity Conversion Mortgages (HECMs), which are a form of reverse mortgage that is insured by the Federal Housing Administration.
When Will the Loan Come Due?
A reverse mortgage will come due when any one of the following situations occurs: selling the home, no longer using it as your primary residence, or passing away. While it is possible for a reverse mortgage to come due if you do not responsibly keep up with property taxes, homeowner’s insurance, and maintenance expenses, these types of default are rare in comparison to the normal, aforementioned situations.
Paying Back a Reverse Mortgage
When a reverse mortgage comes due, the borrower(s) will be responsible to pay the balance of the loan. In most cases, this is done by selling the home. If your home sells for more than what is owed on the loan, you or your heirs will be able to keep any of those remaining proceeds to use as you please. But, what will happen if the loan balance is more than the value of the home? Would you also be responsible for this excess?
Thanks to the Federal Housing Administration, reverse mortgages are insured as non-recourse loans. If you remember paying an FHA mortgage insurance premium (MIP) after closing, you can now see what it’s used for. By charging an MIP, the federal government is now able to use this money to cover any discrepancies between a home’s selling value and the balance of the loan itself. Effectively, the government can make sure that borrowers aren’t blindsided by unforeseen debts. This means that you will never owe more than the value of your home. In other words, even if the loan balance far exceeds the value of your home, you will still be able to repay the loan by selling the home.
Your Heirs Could Keep the Home
Although the loan balance will still be due, your heirs have options to keep the home. In these circumstances, they can either purchase the home for 95% of its current value or pay the balance on the loan – whichever is less. If these options are unappealing, they may also choose to refinance the existing debt into an ordinary home mortgage. Remember: if you or your heirs cannot afford to repay the loan using other funds, your children, relatives, and roommates/renters will have to move.
What if Your Spouse is Not a Borrower?
As a result of the Reverse Mortgage Stability Act of 2013, non-borrowing spouses (NBS) of deceased reverse mortgage borrowers will still be able to stay in their homes without risking foreclosure (as long as property taxes, insurance, and maintenance expenses are handled). In order to protect our clients’ families from the downsides of being a NBS, One Reverse Mortgage chose to ensure that both spouses are on the loan long before it became a standard in the industry.
In any case, when a borrower passes away and his or her NBS remains in the home, the loan will enter a deferral period – at this point, the loan will not become due and payable but the non-borrowing spouse will also be unable to withdraw any of the existing proceeds. Although the NBS won’t have access to these funds, he or she will still be able to enjoy a life free of the burden of a monthly mortgage. Just as it was for the original borrower, the loan will come due when the NBS sells the home, moves out, or passes away. Of course, this spouse must still meet all of the pre-existing HECM requirements such as maintaining the property and paying for taxes and insurance.