How to Pay Back a Reverse Mortgage

A reverse mortgage is a type of home loan available to homeowners age 62 and over to use the equity of their home to borrow money for living expenses. The balance of the reverse mortgage goes up over time with the money taken out of the home. The loan must be paid back after the homeowner has moved out or passed on, but there are other scenarios in which you may want to pay it back earlier.

A reverse mortgage can be an expensive product and should be used only if absolutely necessary. If you’re in the position to pay back a reverse mortgage, you’ll probably want to take it. Here’s a look at how reverse mortgages work, how to pay them off—and when you might be required to pay off or sell—and what you should consider before you pay them off.

How does a reverse mortgage work?

Homeowners who are 62 or over sometimes find they need more money for their monthly expenses. If there’s nowhere else to turn, they may be able to get a part of their home equity paid to them with a reverse mortgage.

There are several types of reverse mortgages, including:

• Home equity conversion mortgages (HECM). These are the most common—between 96% and 100% of reverse mortgages are HECMs—and are offered by many lenders. This type of reverse mortgage is insured by the Federal Housing Administration (FHA).
• Proprietary reverse mortgages from private lenders. These reverse mortgages are from a select few lenders and do not have to follow FHA guidelines for reverse mortgages. It’s a niche financial tool very few homeowners would be able to use.
• Reverse mortgages from government or non-profits for a single-purpose. These types of loans could be fixer-upper reverse mortgages or for another purpose specified by the agency. They may be income-restricted.

One of the main draws of the reverse mortgage is you don’t pay the loan back as long as you live in the home. However, once you leave the home for a certain time period, the reverse mortgage must be paid back shortly.

Qualifying for a reverse mortgage

There are a number of conditions you need to meet to qualify for a reverse mortgage, including:

• Be age 62 or over.
• Live in the home as your principal residence.
• Own your home outright or have a low balance to be paid off by the new reverse mortgage.
• Not have any federal debt, such as student loans.
• Have enough money in your accounts to pay taxes and homeowners insurance.
• Have a home in good condition.
• Receive counseling from a HUD-approved reverse mortgage counseling agency.

You can receive the funds from a reverse mortgage in one of the following ways:

• All up front.
• As monthly installments.
• When you need it (like a credit line or HELOC).

The trouble with these loans is they eat up your home’s equity. Compounding interest and fees are added to the ballooning balance of the loan each month, which is often left to be paid off when the home is sold near the end of life. It’s also possible to run into trouble with the reverse mortgage if you have trouble paying property taxes or homeowners insurance for the home.

When must you pay back the mortgage?

Whether you are living in a home with a reverse mortgage alone, with a co-borrower, or with someone else (including a spouse who isn’t the co-borrower) it’s crucial to know the rules that could trigger the requirement to repay the loan or sell your home. These include not paying taxes or insurance, or allowing the house to become dilapidated.

Crucial, especially if you get sick or enjoy traveling, are the rules about absences from that home.

“Moved away” has some specific time constraints. As the Consumer Financial Protection Agency explains, three time periods of not living at your home can trigger the requirement to pay back your reverse mortgage—all of them depending on whether you have a co-borrower also living there.

• More than two months but less than six. If your co-borrower isn’t living in the home, notify your lender that your home is still your principal residence.
• More than six months for non-medical reasons. If no co-borrower is in residence—and you’re not away for health reasons—you have triggered the pay-back requirement. Any other person living there will either have to pay back the loan or move out.
• More than 12 consecutive months in a healthcare facility. Any non-co-borrower will have to move out unless they can pay back the loan or meet the requirements of being an Eligible Non-Borrowing Spouse.

If you move away permanently but a co-borrower still lives in the home, they can continue to receive payments and don’t have to pay back the loan.

Ways to pay back a reverse mortgage

Once the requirement is triggered, the time to pay off a reverse mortgage comes sooner than you—or your heirs—might expect. After a homeowner has passed away or moved out, the reverse mortgage is due within 30 days of receiving the “due and payable” notice from the lender. It’s common, however, to have a six-month grace period to settle up the reverse mortgage.

If you trigger these deadlines—or, if you’re in the situation where you no longer need funds from a reverse mortgage—you have several options for paying off a reverse mortgage.

1. Sell the home

It’s common to sell the home and pay back the lender of the reverse mortgage with the proceeds. Any remaining funds from the sale of the home go to the homeowner. Be wary of certain investors who want to purchase the property for less than you can get on the market, even when you take repairs into account.

2. Refinance with a new mortgage

Obtaining a new mortgage to pay off the reverse mortgage is one way to keep the home. You also might want to go this route if you want to start making payments to earn back some of the equity lost from the reverse mortgage.

3. Use other funds

You can use savings or funds from another source to pay off the reverse mortgage.

4. Give the home back to the bank

If you’re unable to sell the home and the amount owed on the reverse mortgage eclipses its market value, you may want to consider issuing a deed in lieu of foreclosure. This entails turning over ownership of the home to the bank instead of entering the foreclosure process.

More about paying back a reverse mortgage

There are a few more things to consider when paying back a reverse mortgage.

When do you need to pay back a reverse mortgage?

A reverse mortgage needs to be paid back when the last surviving borrower or eligible non-borrowing spouse sells the home, moves out, or passes away. However, there are some situations where it may need to be paid back sooner, such as if you default on your property taxes or insurance payments. It can also become due immediately if they find the home has fallen into a state of terrible disrepair.

Special considerations when paying off a reverse mortgage

Heirs have a lot of questions when they inherit a home with a reverse mortgage. There’s no way around a reverse mortgage—it needs to be repaid. Take a look at our FAQ section for more common questions.

TIME Stamp: Pay back a reverse mortgage if you’re able

Reverse mortgages aren’t the best loan products in the world, and if you no longer need the income from a reverse mortgage, pay it back if you can. You can refinance with another mortgage, pay it off with other funds, sell it, or offer a deed in lieu of foreclosure (give the home to the bank instead of going through the foreclosure process).

If you’re an heir of a home with a reverse mortgage, be sure to keep track of any paperwork. You may have less time than you think to sell the house or pay the reverse mortgage back.

Frequently asked questions (FAQs)

Is it possible for a family member to settle a reverse mortgage?

Yes, if the family member is an heir of the home, they can settle the reverse mortgage, either by selling the home and paying off the mortgage, or by using another source of funds to pay off the mortgage.

What happens if you can't pay back a reverse mortgage?

The home can be sold and proceeds used to pay off the reverse mortgage. If the loan balance is more than the home is worth, it will be considered paid back if the home is sold for 95% of the appraised value. The mortgage insurance that is included with reverse mortgages will pay off the balance of the loan.

How long do heirs have to pay off a reverse mortgage?

Generally, heirs have 30 days within receiving the due-and-payable notice from the lender to buy, sell, or turn over the home to the lender. However, the Consumer Finance Protection Bureau (CFPB) notes this timeline could be extended to six months.

Are there tax considerations associated with repaying a reverse mortgage?

The IRS does not tax payments made from a reverse mortgage since it is a loan.

Is there room for negotiation regarding the repayment terms with the reverse mortgage lender?

Repayment terms for a reverse mortgage are different than for a traditional mortgage. The loan must be paid back according to the terms agreed-upon when the loan was originated. The one exception noted by the CFPB is when the home is worth less than the mortgage, in which case, paying 95% of the home’s appraised value may count as paying off the mortgage.