Over the last two decades, many thought reverse mortgages should only be used for the desperate and as a last resort. I personally remember when reverse mortgages were being advertised on TV commercials with huge Hollywood stars touting about how great they were. The generation that endured the great depression was quickly stamped the idea as too good to be true.
However, both the loan itself and its reputation have steadily improved over the years. There has been positive press around reverse mortgages. Well known financial advisers are now adding the Home Equity Conversion Mortgage (HECM) to the wealth management toolbox. It’s generally agreed that the FHA and HUD have solved many major problems with the HECM program. With all this new awareness, there still seems to be uncertainty and concern about what happens at the end of a reverse mortgage, i.e. when it comes time to pay it back.
So that brings us to the purpose of this article. We will be examining the last days of the maturity on a reverse mortgage – when it comes due, what happens after the borrower dies, how the borrower’s heirs play into everything, and how you pay off the loan.
What Happens to a Reverse Mortgage When the Homeowner Dies?
The death of the homeowner / borrower is the most obvious instance when a reverse mortgage becomes due and must be paid off. However, there are others, and a more appropriate heading might’ve been “What Happens When a Maturity Event Occurs?”
The homeowner dying is only one of several maturity events. Here are the others that are common:
- Property is sold
- Homeowner signs the title away
- Homeowner lives elsewhere 12 months or more
- Taxes & insurance are not paid in a timely manner (though the new financial assessment largely solved this issue)
- The home is not properly cared for and maintained
Let’s go ahead and look at the process that is triggered by a maturity event:
- Maturity Event Occurs – One of the previously mentioned events occur
- The lender generates a ‘Demand Letter’ – The servicer mails a condolence and demand letter, to either the homeowner or his/her homeowner’s estate. This letter contains the balance on the reverse mortgage and options for paying it off.
- The Estate Sends an Intent to Satisfy Document (within 30 days of the Demand Letter)
- Appraisal – At the same time the lender orders an appraisal of the property
The estate settles the debt by paying the balance or
- The estate submits a request for a 90 day extension or the lender lists the property for Sale
- The estate can submit a second 90 day extension
- Pre-Foreclosure notice – When the extensions have expired or the estate has not responded and, if the property has not sold, the lender will issue a “Pre-Foreclosure” notice
- Foreclosure – As this point the property is foreclosed on.
We’ve created a chart to help you understand the process.
Reverse Mortgage Responsibilities for Heirs
The take away point to borrowers on a reverse mortgage is to keep your family informed of the responsibilities associated with a maturity event. The heirs benefit by contacting the servicer as soon as possible after a maturity event. The home’s equity sans the loan balance are an asset and should be protected. Though uncommon, families have lost complete estates over inaction. This is not a legacy that a matriarch or patriarch wishes to leave. I know of one family that a matriarch knew that her death was imminent and her reverse loan would come due. She and her oldest daughter put together an action packet; it had the letters all pre-written and even stamped. There was a written agenda and even scenarios. This made everyone’s life easier, and we could all learn from this type of proactive organization. Open up and maintain a communication loop between the lender, the homeowners, and the heirs.
Reverse Mortgage Foreclosure
No one benefits from a foreclosure on a property with a reverse mortgage – not the lender, not the FHA who insures the loan, and certainly not the borrower. It’s a situation that is best avoided for all involved. Foreclosing is costly in both time and money, and it makes the lender look bad. However, the HECM program does require foreclosure under certain circumstances.
A word of caution: the heirs of a deceased reverse mortgage borrower will not succeed in hiding that death. Unscrupulous heirs who think otherwise beware. The company servicing the loan has the ability to check death records and databases and will find out eventually.
It also might cause pause to this thinking once it is understood that the 30 days to reply with an “intent to satisfy” letter does not begin at discovery. The 30 days time period begins at the time of death. An attempt at hiding a maturity event just wastes valuable time.
Final Thoughts on Paying Off a Reverse Mortgage
Reverse mortgages can seem complicated, and they end up touching on subjects that many of us may prefer to avoid, such as our mortality or that of our parents. However, if you’re willing to put in the research you can understand how this loan works, and the maturity & payoff process is no different. The bottom line is that this unique financial product is a viable option for homeowners to use in achieving their financial goals.
That said, the reverse mortgage industry is fluid and constantly changing. Some of the information contained in this article may not be current. Your best bet is to speak with a licensed reverse mortgage lender for up-to-date guidelines and with any questions you may have.