Paying Off Your Parents Reverse Mortgage

What is a reverse mortgage? 

A reverse mortgage applies to homeowners age 55 and older who wish to drawdown cash from the home’s equity during retirement. The Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage insured by the Federal Housing Administration (FHA). It allows the owners to tap into the equity for cash through either lump-sum, monthly payments or a line of credit to be used for any purpose. 

Reverse mortgages are FHA-insured up to a limit, for 2022, of $970,800. The maximum amount you can fund is based on your age and the total value of the loan. For people who live in states with very high real estate prices, a jumbo reverse mortgage can help you unlock equity up to $5,000,000. Jumbo reverse mortgages are not FHA insured.

While the homeowners do not need to make monthly payments on the reverse mortgage they do need to meet these three conditions:

1. It must be their primary residence. The most important thing to look after with a reverse loan mortgage is your annual occupancy certification. Generally, this means you must live in the home six months plus one day each year. If you cease to live in the home then the loan may be due payable. 
2. To avoid defaulting on the loan, the reverse mortgage applicants must stay up-to-date on property tax, HOA fees and homeowners insurance. 
3. The home must be kept in good condition. The lender has the right to request a home inspection and should anything major be found in disrepair could request they be fixed within 60 days. Or risk placing the loan in default. 

When do you have to pay off your parents’ reverse mortgage?

Your parents’ reverse mortgage loan is not due for repayment until the borrower dies or fails to meet the above three requirements.  If a co-borrower is still living in the home they can continue to receive the benefits of the reverse mortgage equity. Should adult children or heirs wish to keep the home they will need to consider the options for repaying the loan. 

What are an heir’s responsibilities for repaying a reverse mortgage loan?

While you, as an heir, are not personally responsible for the reverse mortgage loan, the home is the security for the loan. The options to settle the debt include:

• Selling the house to pay off the mortgage
• Refinance the home in someone else’s name (an heir, for example)
• Use cash to settle the remaining balance of the loan
• Give the house to the lender to settle the debt

Typically you will have 12 months to settle the debt and it is essential to remain in touch with your mortgage servicer during this time. Let’s look at the two most common options for paying off your parents’ mortgage in more detail:

Option 1: Selling a home to pay off a reverse mortgage loan

The most straightforward way to pay off your parents' reverse mortgage is by selling it. There are two possible outcomes when an heir sells a home to pay off the loan:

1. The home sells for more than the remaining balance of the loan. When this happens the heirs keep any remaining money from the sale. 
2. The home sells for less than the remaining balance of the loan. In this case, the lender takes the amount the home sale brings in. The lender will then submit a claim to cover the remaining balance under the FHA’s Program. 

If there is more than one heir to the home, plan to have these conversations ahead of time so all heirs are in agreement about what to do with the home.

Option 2: Refinancing the home in someone else’s name 

Although this may be referred to as “buying back,” it’s important to note that your lender doesn’t actually own the home. Ownership will pass on to the heir to determine how to move forward with refinancing or selling the home. 

If you, as an heir, wish to keep the home after the homeowners die, and the reverse mortgage loan is the HECM, you must either pay the remaining balance of the loan or 95% of the property’s appraised value– whichever is less.

While the HECM is the most common reverse mortgage loan, if the equity solution your parents have is different, the terms may also be different. Ask the lender what the requirements are to keep your parents’ home.

You can learn more about the details and requirements to apply for a reverse mortgage here. Remember Equity Access Group is here to help you make the informed decisions about reverse mortgage repayment early on to reduce stress later.