Reverse Mortgage Payments
They do pay us back when they
- Or pass away
Most people choose that last choice; they plan on staying in their home as long as they can. Does that sound like your situation?
There are no monthly payments required in a reverse mortgage. The loan becomes due and payable when one of the three conditions above is encountered.
Payback of a Reverse Mortgage When the Borrower(s) Sells the Home
This works the same way as someone with a regular mortgage would the payoff. Once an agreement with a buyer is made, an escrow will be set up. When all the conditions of the sale are met by the buyer and seller, the escrow officer will disburse the funds. One of the checks will go to the lender of the seller's loan. Another check will go to the seller. The amount going to the seller will be the selling price minus the loan and other costs.
Payback When The Borrower(s) Moves - Still Equity in the Home
When the borrower moves, the loan becomes due and payable. This can usually happen in two ways. The borrower may have bought another home to use as their principle residence but choose to keep the original home as a second home, rental or for their children to use. Other times, the borrower may need to move into an assisted care or nursing home.
When a borrower moves, they need to make arrangements to payoff their reverse mortgage. They may take out a regular mortgage to do this. They may have enough money to payoff the loan with out needing a mortgage. They may also take out a reverse mortgage on their new principle residence to payoff the other reverse mortgage.
In the case of someone moving to an assisted living or nursing home, there are different guidelines depending on the situation. To begin with, there is a 12 month grace period. If the borrower is gone six months and returns to the home the loan is not yet declared due and payable. If the borrower needs to go to an assisted living or nursing home again, they clock starts over, even if it is within the original 12 month period.
Once the time away from the home and in an assisted living or nursing home has been 10 or 11 months, the borrower or someone helping them may decide they will likely never return to the home. That would be the time to decide how to payoff the reverse mortgage. The answer is usually to sell the home.
Note, when there are two borrowers, both are still living and only one goes into an assisted living or nursing home, the home is still occupied by one of the borrowers. This means there is no clock ticking towards that 12 month grace period since the home is still owner occupied.
In the case were the borrower wishes to move immediately but there is equity in the home and worth the effort to sell it, here is one approach.
The borrower is allowed to be out of the home for some period of time. In the case of being in a care home, the rule is that 12 months are allowed. For other reasons, it is not so black and white. Usually, as long as the home is used for over half the time, it is usually assumed that is your primary residence (and allowed as part of a Reverse Mortgage). So, go ahead and move where you need to, put the home on the market and see if it sells within the first six months. Let the lender know you will be on a long trip. Remember, nearly any home will sell - it is just a matter of the right price. Maybe that right price is less than you hoped but if it still provides net cash to you, it is better than turning the home over to the lender.
Once six months have passed and you haven't sold the home, you've got a couple options. Just keep trying to sell the home and hope the lender doesn't find out you are away. Remember, the lender sends a letter once a year asking you to sign stating you still occupy the home as your primary residence. To lie would be Federal Fraud. I don't think that is a good way to go.
Alternately, contact the lender, let them know you are selling the home and ask for their guidance. Even if they were to call the loan due and payable immediately, it would still take another 60,90,120 days or so to go through the foreclosure process - assuming they started it immediately. If you haven't sold the home by the time that process has completed, just assume the home wasn't worth as much as you thought (or you'd have sold it) and let it go.
Payback When The Borrower(s) Moves - No Equity in the Home
First, don't assume the value is less than what is owed. I've talked to a number of borrowers who just wanted out from under. Check with a Real Estate agent and get an estimated selling price and compare that with how much is owed. If it looks like there might be money left over after selling, closing costs and paying off the Reverse Mortgage, it may be well worth your effort to sell the home and keep the excess.
Assuming there is no equity left - the loan amount is more than the home is worth. It is not really worth your effort to try and sell the home - perhaps as a short sale. Since there will be no money left over, why bother.
If you are not pressured to move immediately, take some time to try and sell the home prior to moving. Empty homes don't don't usually sell for as much as an occupied home.
Sometimes, it may be important that you move right away. I can think of one of my borrowers that had medical issues, lived out in the country and the hour drive each way down a winding road was too much for her. She needed to move into her daughter's home who was close to her doctor and hospital. She knew she wasn't coming back to the home.
Remember, the loan is due and payable when the borrower sells, moves or passes away. I instructed her to contact the lender, let them know she moved and wouldn't be returning. She just needed to know how to transfer title to them and let them sell the home to get as much of the balance owed as possible. (Remember, one of the fees the borrower pays is MIP (Mortgage Insurance Premium). This allows the lender to put in a claim to HUD for any shortage of money when the home sells for less than owed.
The lender had her execute a Deed in Lieu. Sort of a voluntary foreclosure that transfers title from the borrower to the lender. Once that was done, the lender took it from there. It is probably not quite as simple as it sounds - there were a few hoops to jump through but not too bad.
Payback When The Borrower Passes Away
When the last surviving borrower passes away, the loan is due and payable. If there are two borrowers and the first one passes away, the loan remains active. The loan is good for all the borrowers life times.
The terms of the reverse mortgage require the loan to be paid back within 6 months of the death of the last borrower. However, typically, HUD will allow two 90 day extensions if the executor/successor trustee requests them. The extensions have to be requested prior to the end of the fifth month. There has to be a good reason. A typical reason might state the home has been on the market for sale, the real estate agent believes it is priced correctly for the current market and it is expected to sell soon.
Paybacks When Not Required
There are no prepayment penalties and payments of any size can be made at any time during the course of the loan. There are very specific requirements as to how the payments are credited but, in general, the balanced is reduced (meaning interest won't grow as fast) and the Line of Credit is increased (meaning more money to use later).
If the full amount is being paid off care should be taken if the borrowers wish to retain the reverse mortgage but with a zero balance accruing interest. Make sure the servicing department knows your intentions. If they do not and receive a payoff zeroing the balance, they will accept the payoff and close the reverse mortgage. A new reverse mortgage would then be needed to access the equity in the home again.