A reverse mortgage can be very beneficial to homeowners who are 62 or older, giving them the opportunity to live in their home with improved cash flow and with no monthly payment (they are still responsible for property taxes, hazard insurance, maintenance, as well as flood insurance and HOA dues if applicable). During the term of the loan borrowers use their proceeds for everyday living expenses, retirement planning, long term care, purchasing a new home, fulfilling dreams and wishes and needs of retirement.
Unlike a traditional mortgage, the loan is not due until the borrower is no longer in their home as their primary residence. The due date on the mortgage is actually the 150th birthday of the youngest borrower. Of course this all depends on the terms of the loan being followed. As a non-recourse loan there is no personal liability, the loan is only repaid from the property, not from other assets. If the home is sold for more than the loan balance the borrower or estate keeps the difference.
The reverse mortgage does not automatically become property of the lender or bank nor do they automatically start foreclosure. Foreclosure is the last resort HUD and the loan servicers want to take.
One of the more common questions we as loan originators get is, “How long do I or my children have to pay off the reverse mortgage?” So what happens when the borrowers are no longer in their home?
Obviously it is nearly impossible to repay the loan the day it becomes due (the date of death or moving out of the home or not abiding by the terms). But there are some important details that need to be addressed right away. HUD has some pretty tight requirements the lender’s servicers must follow when it comes to satisfying the reverse mortgage repayment. (Not always the same as the lender, servicers are companies lenders contract with to handle the servicing of the loan. These are the companies who have mailed the monthly statements, release the line of credit funds or monthly payments, etc. during the term of the loan.)
Communication, communication, communication and more communication with the servicer is of the utmost important when a reverse mortgage borrower is no longer in their home. The borrower or their estate must move quickly in contacting the servicer so they can make use of the maximum time that can be allowed by HUD for satisfying the loan. And it must happen quickly after one is no longer in their home.
Following is an outline of the steps that must be taken when the reverse mortgage becomes due and payable.
- The servicer must be notified within the 1st 30 days of the borrower being out of the home by death or moving, etc. Note it is based on the actual date of death or move out date, it is not based on the date the servicer is notified. This can be done over the phone followed up with written documentation.
- Condolence/demand letter mailed from the servicer. This letter may seem harsh and insensitive but the wording is required to stress the importance of the loan being due and the time frames required to satisfy the loan.
- Options are provided to satisfy the loan:
- Paying it off via sale of the home to a third party.
- A family member finding financing if they choose to keep the home.
- If it looks like the home value is less than the loan balance, contact the servicer to make arrangements to pay the loan at 95% of the appraised value. The servicer will order an FHA appraisal within 30 days.
- The borrower or estate must be prepared for this and allow this by providing a contact to allow an appraiser access to the home. With the full appraisal, it can be used for a short-sale. If a full appraisal is not completed and they only do a “drive-by” one, another appraisal will have to be obtained for the short-sale.
- The borrower or the estate has the option to do a Deed In Lieu of Foreclosure. This is taking all personal property and “broom sweeping,” cleaning out debris and trash from the property then turn the marketable title over to the servicer.
- Walking away and allowing the lender to foreclose.
- Within 30 days of receipt of the demand letter borrowers or their estate must respond to the letter and return a written “intent to satisfy the loan” document.
- Within 60 days the servicer must receive copies of death certificate; copies of probate proceedings, appointment of executor, administrator or personal representative of the borrower’s estate; copies of the trust, Life Estate or Transfer on Death Deed if applicable.
- Within 60 days the home has to be on the market documenting the intention of satisfying the loan. This documentation must be sent to the servicer immediately.
- If intention is to not sell the home, documentation of financing to pay off the loan must be provided within 60 days.
IT IS IMPORTANT TO PROVIDE AND DOCUMENT THE INTENTION OF SATISFYING THE LOAN QUICKLY!
If the communication with the servicer is happening and necessary documentation is provided to the servicer in their time lines then the borrower or their estate are provided 6 months to satisfy the loan. It may be possible to receive up to two 3-month extensions. But this is where the communication is important. One must NOT assume they have this time. If the servicer does not receive the communication and documentation according to their time lines, they will start the foreclosure proceedings according to HUD’s requirements.
And what happens if one doesn’t notify the servicer or follow these time lines?
If one doesn’t notify the servicer or follow these times lines then a letter of demand will be resent. If no response to the demand letter is received the servicer will refer to an attorney to start foreclosure to collect the debt. The 1st action to start the foreclosure will begin within 180 days by the foreclosure attorney.
If the last surviving borrower passes and the servicer is not notified within 30 days of the death, a notice of foreclosure is sent and attorney contacted. The more time that passes the less time the estate has to satisfy the loan and avoid foreclosure.
Foreclosure of the reverse mortgage follows the laws of each state. There may be time to satisfy the loan even after the foreclosure has started however extra fees will be added to the loan balance.
Paying taxes, keeping hazard insurance on the property and if applicable, flood insurance, maintaining the property and not changing title are all borrower’s responsibilities under the terms of the loan.
Borrowers are responsible for providing the following information to servicers:
- Complete required repairs according to timeline outlined at closing.
Responding to and returning the letters of occupancy that are mailed to borrowers on the anniversary of their reverse mortgage closing.
- Providing proof that property taxes have been currently paid on an annual basis.
- Changes to any of your insurances with the updated information, i.e. if you change from one insurance company to another letting them know who the new provider is.
- If you are out of the home for extended period of times, i.e. for hospital or rehab stays or long term travel.
Be sure to timely open and review mail from lenders and servicers to ensure you are taking care of your responsibilities and responding to their communications.
If the servicer does not receive this information they will make attempts to obtain it. If they are unsuccessful in obtaining it they are required to notify HUD who will likely require the foreclosure process begin to meet their deadlines.
Default for Not Paying Property Taxes, Insurance, Abiding by Terms of Loan
If the loan has become due and payable due to lack of payment of taxes and/or insurance or not occupying the property according to the terms of the loan, HUD has the right to foreclose on the property. And this may happen! When this does happen, the borrowers are not losing their home due to the reverse mortgage but because they didn’t abide by the terms of the loan. If one doesn’t pay property taxes the county can, and does, foreclose whether there is a traditional mortgage, reverse mortgage or no mortgage.
When one is in default due to one of the terms of the loan not being adhered to the demand letter for repayment is sent. There may be options to cure the default so one should reach out to their servicer to see if they can qualify for one of these.
If an arrangement cannot be made to cure the default, the foreclosure process may begin and an attorney contacted.
Servicers Check Public Records
The servicers are regularly checking public records and will send the demand letter for repayment if they learn the last surviving borrower is no longer in the home or a borrower hasn’t paid property taxes, kept insurance on the home or maintained the property.
Once a loan payoff is requested the funds from one’s line of credit and/or monthly payments will be frozen. If you, the borrower, are thinking funds will be needed for the move, fixing the home for sale, etc. make sure funds are requested prior to the move and payoff request. The heirs, because they are not borrowers, cannot request funds.
Until the loan is actually paid off, the borrowers or the estate are responsible for maintaining the property, paying property taxes, utilities, maintaining hazard insurance, flood insurance if applicable, on the property, etc. Interest and the FHA Mortgage Insurance Premium will accrue as well as a servicing fee if one was on the loan.
Keep reverse mortgage information with other important documents
I strongly encourage you to have your reverse mortgage information, lender, servicer contact information with your other important documentation so your estate can notify the servicer timely. Remember if the servicer is not notified timely and communication not continued, they are missing opportunities to have the time to satisfy the loan.
Some borrowers choose not to tell their children they are doing or have done a reverse mortgage. This is their right. Doing a reverse mortgage is their own personal financial decision. If this is your choice it is even more important to have your reverse mortgage information with your other important documents so they have the opportunity to respond timely.
This article does not address non-borrowing spouse situation. If you are a non-borrowing spouse and the borrowing spouse has passed, contact the servicer immediately. HUD has made provisions for non-borrowing spouses to possibly remain in the home but the servicer must be contacted immediately and additional documentation must be provided to determine one will qualify for this option.
I’m here to assist my borrowers
I, as a broker and loan originator, do not have access to the servicing information, however I am available even after the loan has closed to answer borrower’s questions and guide them through the process. I welcome the opportunity to guide and advise my borrowers on the steps they need to take and referring them to the servicer timely. Other reverse mortgage brokers also welcome the calls so while you ultimately need to talk with the servicer, don’t hesitate to reach out to your broker loan originator for some guidance.
Thanks to Ryan LaRose from Celink for assistance by providing information.
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