Spotlight on Advertiser: The Paseo Financial Group – How is a reverse mortgage paid back?

A reverse mortgage has to be paid off when the borrowers move out or die. These are the options for paying off a reverse mortgage before or after the borrower’s death.

Sell the house and pay off the mortgage balance

Usually, borrowers or their heirs pay off the loan by selling the house and securing the reverse mortgage. The proceeds from the sale of the house are used to pay off the mortgage. Borrowers (or their heirs) keep the remaining proceeds after the loan is paid off.

Sell the house for less than the mortgage balance

HECM borrowers who are underwater on their house can satisfy their loan by selling the house for 95% of its appraised value and using the difference to pay the HECM. Even though the sale may not cover the balance due on the loan, the Federal Housing Administration (FHA) doesn’t allow lenders to come after borrowers or their heirs for the difference, and this won’t hurt your credit score.

Have a child take out a new mortgage on the house after your death.

An heir who wants to keep a house can either pay off the HECM or take out a new mortgage to cover the balance of the reverse mortgage. If the balance on the reverse mortgage is higher than the value of the home, heirs can buy the house for 95% of its appraised value.

Heirs who want to keep a house should start applying for a new mortgage soon after a borrower’s death because the FHA only allows six months for the estate to pay off the HECM. During those months, the balance on a reverse mortgage continues to grow, which makes dealing with the reverse mortgage right away even more important.

Refinance to a forward mortgage.

A borrower that wants to move out of a house but keep it as a rental property will need to find a way to pay off the reverse mortgage. To keep the property, borrowers may be able to use savings to pay off the reverse mortgage or refinance to a forward mortgage. Seniors refinancing to a forward mortgage will have to meet credit score, debt-to-income and down payment requirements.

Spouses and partners have both rights and obligations

When you and your spouse are co-borrowers on a reverse mortgage, neither of you have to pay back the mortgage until you both move out or both die. Even if one spouse moves to a long-term care facility, the reverse mortgage doesn’t have to be repaid until the second spouse moves out or dies.

Because HECMs and other reverse mortgages don’t require repayment until both borrowers die or move out, the Consumer Financial Protection Bureau (CFPB) recommends that both spouses and long-term partners be co-borrowers on reverse mortgages.

If your spouse is not a co-borrower on your reverse mortgage, then they may have to repay the loan as soon as you move or die. A non-borrowing spouse will either have to refinance the reverse mortgage into another reverse mortgage in their name, refinance into a forward loan, sell the house or pay off the reverse mortgage within six months of receiving notice from the lender.

The bottom line

Reverse mortgages are complicated loans, so borrowers and their heirs need to understand how to repay the loan when it comes due. By knowing and talking through the options in advance, reverse mortgage borrowers and their family members can decide what option makes the most sense for them.