The term length of a reverse mortgage is not determined by a number of years but rather by a set of conditions that include the borrower living in and maintaining the home. When the borrower no longer meets those conditions, the mortgage term will end. Typically, an “event” will trigger the reverse mortgage to come due. This is a reverse mortgage maturity event.
What Qualifies as a Reverse Mortgage Maturity Event?
There are a variety of events that can trigger a reverse mortgage to come due. Some maturity events occur as the natural conclusion to the mortgage. These events are expected as part of the loan process. They include the death of the last borrower or the borrower leaving the home for another residence. The scenarios in which leaving the home cause a maturity event include:
- The sale of the home.
- The borrower spends more than 12 months concurrently out of the home, for example, in an assisted living facility.
- The homeowner transfers the title to another individual.
Other maturity events occur as the result of a default on the mortgage. Because reverse mortgages do not require the borrower to make monthly mortgage payments, default is rare. However, it can happen in the following situations:
- The home falls into disrepair, and the borrower doesn’t bring it up to an acceptable standard.
- The borrower fails to pay property taxes, home association dues, insurance, or any other homeownership costs specified in the mortgage.
If a borrower feels they are in danger of defaulting on their reverse mortgage, it is important to communicate with the loan servicer. Usually, the servicer can work with the borrower to resolve the issue causing the default. It is in everyone’s best interest that the loan not go into default.
What Happens After a Reverse Mortgage Maturity Event?
When a non-default maturity event occurs, the borrower or their heirs must notify the lender. Within 30 days, the lender will send a letter to the borrower or the estate. This letter will state the loan balance and principal, ways to pay it off, and a timeframe for a response.
How Should the Borrower or Heirs Handle a Maturity Event Letter?
Contractually, when the borrower or heirs receive the maturity event letter, the payment is due immediately. However, in practice, the process can take much longer. After a maturity event occurs, it’s important for the borrower or heir to begin communication with the servicer. In most cases, the servicer allows the borrower or heirs six months to decide what they plan to do with the property. Depending on market conditions and the time it takes to sell the property, a servicer can grant an extension of up to 12 months.
Though it is possible to extend the deadline, paying back the mortgage as soon as possible is financially advisable. Interest and mortgage insurance premiums continue to accrue until the balance is paid.
Once a maturity event happens, the borrower or heirs will have choices to make. In general, a borrower or heirs have three options in responding to a maturity event:
- Keep the property. To keep the home, the borrowers or heirs must pay off the lesser of 95% of the appraised home value or the loan balance.
- Sell the property. Selling the home will mean that the lesser of the outstanding balance or 95% of the property’s appraised value will go to satisfying the mortgage balance. The borrower or their heirs keep any excess funds.
- Provide a deed in lieu of foreclosure. A deed in lieu of foreclosure allows the lender or grants the lender permission to sell the property, pay off the balance, and distribute any excess funds to the borrower or heirs.
- Allow the house to go into foreclosure. While not a recommended course of action, if the borrower or heirs do not respond or take any actions to settle the loan, the home will naturally go into foreclosure.
Communicating and working with the loan servicer to repay the loan after a maturity event occurs can help ensure an easy resolution.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.