What Happens When You Get A Reverse Mortgage?
Although the reverse mortgage is a complex product, the rules and regulations surrounding this loan exist for good reasons. Whether you’re looking to buy a new home with a HECM for Purchase, establish a long-term financial cushion with a HECM Line of Credit, or get more out of your equity with our Home Equity Loan Optimizer (HELO), there are still a few things you should know about what happens when you close your reverse mortgage.
The Process After Closing
While there are some rules that apply to all types of reverse mortgages, it varies from loan to loan. For example, as soon as a HECM is closed, a couple of events must occur. First, a three-day period known as the “Right of Rescission” period must pass. During these three business days, the homeowner will have the option to cancel the loan entirely if they wish. Once this period has passed and the borrower has decided to continue with the loan, the funds will be disbursed in the form requested. However, keep in mind that there is no right of rescission period for a HECM for Purchase reverse mortgage.
For borrowers with a HECM, only 60% of total proceeds may be withdrawn during the first year of the loan. This safeguard has been put in place by the federal government to encourage borrowers to save money so that they can maintain a financially stable position. By the time funds are disbursed, the loan has been accepted by the Loan Servicer which may or may not be the same company as the Loan Originator. Shortly after the loan has closed, you should receive a letter from your Servicer with an introduction and contact information. This Servicer will also be responsible for your monthly account statements and you can contact them with any questions regarding your loan proceeds.
However, some kinds of proprietary reverse mortgages – such as our own HELO – feature exceptions to these rules. With the HELO, for example, you will not be restricted to withdrawing only 60% of total proceeds in the first year – rather, you will be able to withdraw your full 100% disbursement as soon as the loan has closed. To have your specific questions answered, feel free to call us and speak with a licensed specialist.
Now that the loan has closed, what’s next? What happens when the loan finally comes due?
What Happens When a Reverse Mortgage Comes Due?
A reverse mortgage could come to an end in one of several ways. For a HECM, the loan will come due when the last surviving borrower or non-borrowing spouse sells the home, passes away, or does not live in the home as their principal residence for more than 12 months, the loan will come due. Borrowers must also pay property taxes, homeowners insurance, and maintenance expenses to avoid foreclosure.
Once the servicer of the loan has verified that it is time for the loan to come due, the borrower or their heirs will be alerted that the loan must be repaid. Because the reverse mortgage is a non-recourse the loan, the debt can be settled entirely by selling the home regardless of how large the balance is. Otherwise, the property may also be repurchased for 95% of its current appraised value with any remaining equity in the home being transferred to the borrower or heirs. While refinancing the home into another loan or paying the debt via other means are less common, they are still viable options for settling the loan account.
We hope that we’ve answered some of your questions. While the reverse mortgage can be a complicated loan, the rules and regulations governing the post-closing process are rather straightforward. If you have additional questions, feel free to call us and speak with a licensed specialist.