After Getting a Reverse Mortgage
As a borrower, you have several obligations that you must meet once you’ve secured a reverse mortgage. Failure to adhere to any of these requirements will result in your loan becoming due and payable. This means you will be required to pay back the money borrowed, which can be difficult with a fixed income during retirement. As such, it’s important to understand what can trigger this so you can avoid potential issues.
The guidelines below relate to the most common type of reverse mortgage, the Home Equity Conversion Mortgage (HECM); the HECM is backed by the federal government through the Department of Housing and Urban Development (HUD). Other rules may apply to private or “proprietary” reverse mortgages; always review the paperwork you sign with your lender if you have questions about your loan. If you need help choosing a reverse mortgage or you’re having problems with a reverse mortgage you’ve already secured, we can help. Call Consolidated Credit today at 1-800-435-2261 to speak with a HUD-certified housing counselor for free with no obligation.
Obligation #1: Maintain the Home as Your Primary Residence
With an HECM reverse mortgage, the home must be your primary residence (i.e. you must live there more than six (6) months per calendar year). One exception is that you can be absent from your home for health reasons for up to a year. If this happens, make sure to advise your lender so they are aware that you are living outside the home for health reasons. If you have a different reverse mortgage product that is not an HECM, it may have different requirements so you will need to discuss residency terms with your lender.
Obligation #2: Pay Property Taxes, Homeowner’s Insurance and Flood Insurance
After you secure a reverse mortgage, you are still required to pay for any property taxes and homeowner’s insurance yourself. Failure to maintain the appropriate insurance could result in the loan becoming due and payable and you may lose your home. Insurance payment may also be paid with funds from your reverse mortgage, but the lender can only make payments on your behalf if there are funds available from your reverse mortgage to do so.
Obligation #3: Maintain the Property
Your property must be maintained in at least the condition that it was in when the reverse mortgage was taken out. Reverse mortgage lenders reserve the right to perform “drive-by” inspections. If one of these inspections is performed and problems are identified with the condition of your home, you would be required to remedy them or run the risk having your reverse mortgage payments become due and payable.
If you have concerns about maintaining your home in proper condition, one option is to create a checklist for normal maintenance procedures. Go through your list four (4) times each year to make sure that you are keeping your home in good shape. However, make sure to take care of any obvious issues as they arise, since procrastination on home repairs tend to make the problems worse.
What to Do If You Need to Make Changes to Your Loan
You may change the payment plan on your HECM loan at any time. For example, a tenure payment system can be converted to a more easily accessible line of credit or vice versa. A maximum fee of $20 will be applied to your loan balance when you change your HECM payment option.
Prepayment of your loan is possible, with no penalty. Please see below, since there can be major differences for variable and fixed rate loans.
Repaying a Reverse Mortgage Loan
To know where you stand with your reverse mortgage, you should regularly review the monthly statements you receive.
A HECM loan with adjustable interest rate will adjust every month or year, depending on the type of loan you have. This would also be the case with many other proprietary reverse mortgage products you may secure through private companies.
Your lender will keep you informed of your debt with monthly statements. These statements show how much you would owe if you were to pay off your loan starting the month after the statement was issued. This is the same amount you would need to pay back if you moved or sold your home.
If you are receiving payments as a line of credit, the monthly statement will show you how much you have left that is available to borrow. Remember, with a line of credit your available funds grow by the same rate the lender is applying to your balance. And you can add to or withdraw from your line of credit at any time, if there aren’t any limitations on how many withdrawals you can make in a given month.
Loan Prepayment: For a HECM, you may prepay all or part of the debt at any time without any penalty. You can even choose to make a partial prepayment to preserve more of the equity in the property. If you have a reverse mortgage from a private lender, always discuss prepayment policies for with your lender, since you may incur penalties for early repayment.
Variable HECM loans with a line of credit allow you borrow in the future against any payments you may have made to your balance; it is an open line of credit. By contrast, fixed-rate products are closed-end credit loans, meaning that you re-borrow principal that is repaid on the loan.
No matter what kind of reverse mortgage you have, at the end of the loan, repayment is required.
Reverse mortgages typically do not become due and payable until the last surviving borrower dies or the home is no longer the primary residence of any borrower. If you pass away, then your estate will be required to pay off the loan.
A HECM reverse mortgage, and most proprietary reverse mortgage products, can be repaid in a variety of ways. In the case of your death, your heirs can take out a new mortgage on the home and pay off the loan with those funds, or they may use other funds they have available.
If your heirs choose to retain ownership of the home and the loan balance exceeds the value of the home, they must pay the full loan balance. However, if the home is sold, the fair-market home value for which it is sold is the maximum payback required, regardless of the actual balance of the loan.
If there is money left in your line of credit and you are planning on selling your home, evaluate whether the debt is higher than the home value. If it is, withdraw all funds from the line of credit before selling the home. Upon the sale of the home, your debt is limited to the amount of the (fair market) sale price. A line of credit withdrawal cannot be made after your death.