By far, the biggest misconception that people have about reverse mortgage is what happens when the loan comes due?
Before I get into what happens when the loan comes due, I want to make sure you understand what causes the loan to come due. You probably know that a reverse
mortgage can only be on your primary residence meaning that you have to live in the home for a minimum of six months and one day out of the year.
You can be a snow bird and leave for the winter, but you cannot rent out your home while you are away.
If you rent it out or move to a different home as your primary residence, the loan will be called due and payable.
However, you are allowed to rent out rooms as long as you still live there. The loan also will be called due if you remove your name from the
title of the home. If you are married, only one persons name needs to remain on the title, so if you get a divorce, as long as one person stays in
the home, the loan will continue.
The same goes in the case of a death of a spouse. The last thing you need to be worried about if you lose a spouse is your mortgage. The reverse mortgage
will continue as normal in this case. You just need to contact the servicing company to let them know that the loan should be just in your name only.
Lastly, you need to be aware that you must pay your property taxes and homeowner’s insurance. If you do not keep current on these expenses the lender
can foreclose on you. This is no different than if you own your home free and clear and don’t pay the taxes. In that case, you will also lose your
home.
In any case, when the loan comes due, the bank does NOT take your home.
Typically, the homeowners either pass away or move out of the home for assisted living. When this happens, the heirs will still inherit the home. They
have a choice to either sell it, refinance the loan to pay it off, or sign the home over to the bank and walk away.
If there is equity in the home, the heirs have six (6) months to sell the home or refinance it to pay off the reverse mortgage loan.
If more time is needed, they can request two (2) 90 day extensions. This gives them up to one year to pay off the loan. If they sell or refinance
the loan, whatever equity remains in the home will go to the heirs.
If there is no equity left in the home, then they can either sign it over to the bank, or get a new loan for 95% of the current value of the home and the
lender has to accept that as payment in full.
Remember, you never have to make a mortgage payment on the reverse mortgage loan, but you are still charged interest and mortgage insurance every month.
These charges are added to the loan so the balance on a reverse mortgage gets larger instead of smaller over time. This is called negative amortiza-tion.
These charges can grow beyond the value of the home over time.
This is the reason all FHA reverse mortgages have mortgage insurance. MI pays the lender for any loss so they cannot come after your estate or heirs for
any loss. The worst case scenario is there is no equity left in the home when you pass away.
However, if your heirs want to keep the home, even if more is owned on the loan than the home is worth, they can do so by paying just 95% of the value
of the home at the time that you pass away.
I hope this clarifies that the bank will not take your home when you die. Your heirs have options as well as whatever equity remains, without the risk
of having to pay back more than the home is worth.
