What happens when the Reverse Mortgage Comes Due?
Just a reminder, the loan comes due when:
1. The borrower(s) sell the home
2. The borrower(s) move
3. The borrower(s) die (the last one to die.)
4. The borrower(s) violate the Reverse Mortgage Contract. Usually this means they are delinquent on homeowner’s insurance or property tax or don’t maintain the home and the lender learns of this.
All these answers could have a long description. I’m going to give you a relatively short answer and you can ask more questions if needed.
1. When the borrower(s) sell the home, the mortgage will be paid off by the escrow company just like a regular mortgage. If there isn’t enough money in escrow to do that, the lender will apply to HUD to be reimbursed for the shortage from the Mortgage Insurance fund the borrower has been paying into.
2. When the borrower(s) move the loan becomes due and payable. If there is still equity in the home, the borrower(s) should sell the home and get some money out of it. If they owe more than the home is worth, they don’t have to make up the shortage. But they should work with the lender and make it easy on them. If they don’t, the lender will need to foreclose to get title so the lender can sell and that can’t be good for the borrower.
3. When the last borrower on title dies, the loan becomes due and payable. But that doesn’t mean the lender expects payment next week. There are some general guidelines depending on how they will be paid. Note: the clock starts ticking from the date of death. Not from the date of notification. Don’t run yourself short of time by putting this off.
First, the only person the lender will discuss this with is the Executor or Successor Trustee. They will need a copy of the death certificate(s), and the will or trust. Once it is established who they can talk to, they will ask for a written statement of what the plan is.
So, the executor/trustee should determine if the home is worth more than owed. If not, they will probably find it best to work out arrangements on how to turn title over to the lender.
If the house is in a trust, the Successor Trustee may be able to make that happen.
However, if the home is not in a trust, probate will likely be required. Depending on the complexity of the estate, it is not unusual for probate to take a year or more. This will cause some timing issues for the executor. Certainly, this is one reason why owners of real estate should likely consider creating a trust.
If the home is worth more than owed, it then makes sense to pay off the loan and keep the house or sell the house and split what is left over after paying off the reverse mortgage, any other liens and closing costs. In most cases with two or more heirs, that is usually the only way to divide up the estate.
If the Executor/Successor Trustee says they will just pay off the loan and have title transferred into an heir’s name the lender will likely offer a relatively short period of time to make that happen. Usually in the 30-60 day range.
If the lender is told the heirs will likely sell the home and pay off the mortgage with the proceeds, the lender will usually offer six months. If the home hasn’t sold by then, the lender may be able to apply to HUD for up to two 90 day extensions if certain conditions are met. At a minimum, the home has to be listed for sale and the Real Estate Agent may be asked if the house is priced right. It may be that the lender will only be able to grant an extension if the home has received an offer and is in escrow.
4. If the borrower(s) violate the Reverse Mortgage Contract because they are delinquent on homeowner’s insurance or property tax or don’t maintain the home and the lender learns of this the loan will be called due and payable. There may be relatively easy solutions to have the loan reinstated, if done in time. In most cases, if the borrower(s) bring homeowner’s insurance or property taxes current, the loan may be reinstated. The same is true if the deficiencies in the home maintenance are corrected quickly.
In some cases, money wasn’t the issue and the corrections can be made quickly.
In other cases, a shortage of money was the issue and corrections can’t be made quickly. Be aware the lender CANNOT just turn a blind eye to this so the borrower shouldn’t either. HUD will require the lender to foreclose if these issues aren’t fixed.
In my opinion, the borrower (or someone who may be helping them at this point) should determine if they could keep current on taxes, insurance and maintenance even if everything was brought current. If not, it may be time to sell the house (assuming there is still equity) and move on now rather than finding themselves in this difficult position more than once.
If the borrower(s) just had a single problem (maybe they were in the hospital when taxes and/or insurance came due and they were not able to deal with it) then it might make sense to do their best to get current and stay in the home.
If money is a problem for what now might be a much bigger dollar amount then they may need to get creative on solving that issue as quick as possible. Here are a few thoughts to get them started:
a. Check with friends or family.
While the dollar amounts may be big for you, they may not be
for them. Especially
check with heirs, it is probably in their best interest to help keep
you in your home or you might end up on their doorstep.
b. Check with local city, county or state offices. They may have a fund to help homeowners in such a situation.
c. Check with local charities. This may be their own church. If, in my example, they were in the hospital with a disease, the local office of the charity that raises funds for this disease may be able to find a way to help them.
d. Try crowd funding. For instance, GoFundMe.com is a website that people can donate to in order to help others overcome some problems. But this needs a lot of publicity so you would need to get the word out, either to friends and family or through the local newspaper.
This subject can be very complicated. I’ve tried to keep it fairly simple here but purposely not covered all the details. If you find yourself in this position, get more details relative to your specific circumstance.