A mortgage may feel like you are lo longer in control of your house.
When you get a mortgage, the title of your house remains in your name. This means that you may handle your property as you wish, as long as you fulfill the conditions of the loan. A reverse mortgage may seem a little more confusing as the borrower does not make monthly payments, like in a traditional mortgage. This gives the false feeling that the lender has ownership of the house. If you have a reverse mortgage or are thinking of getting one, you should know what you’re signing up for and how it will affect your future plans.
How Does A Reverse Mortgage Work?
Reverse mortgages are intended as the last loan you will ever withdraw. It is meant for seniors 62 years or older who have built equity in their homes and need an additional source of income after retirement for example. Equity is the difference between the market value of your home and how much you owe on it in debt and liens. The less the debt on it, the more is the equity you own. Typically, you need at least 20% equity before the lender will consider you for a loan.
A reverse mortgage differs from a traditional mortgage in that the borrower does not have to make any monthly payments to the lender. On the other hand, the borrower receives payments from the lender either in the form of a lump sum amount, a monthly disbursement, a line of credit from which money can be withdrawn any time, or a combination of these. The more the borrower withdraws, the less the equity remains in the house. The reverse mortgage loan becomes due and payable in case of a loan maturity event. A loan maturity event could be any of the following:
- The borrower does not pay the house insurance, the homeowner’s association fees, or does not keep up with the maintenance of the house.
- The borrower moves away from the house for up to 12 consecutive months. This can be due to a vacation or shifting to another place of residence like a treatment facility.
- The borrower sells the house.
- The borrower transfers the title of the house to another person.
- The borrower passes away.
In short, the borrower has to maintain the house as his primary residence to keep receiving the reverse mortgage on it. If a loan maturity event occurs, the entire loan becomes due and payable on the borrower, or the heirs of the property, at once.
Who Owns A House With A Reverse Mortgage?
Just as with a traditional mortgage, the owner of the house or the borrower of the mortgage owns the house with a reverse mortgage. The ownership does not pass over to the lender. The title remains in the name of the mortgage taker or their heirs. Beware of reverse mortgage scams which may tell you otherwise.
Can You Sell A House With A Reverse Mortgage?
So you took out a reverse mortgage but are now planning to move to the beachside with your spouse. Can you sell your house with the reverse mortgage still on it? There is no clause in the mortgage agreement that states that you are not allowed to do so. Since you are the owner of your property, you may retain or sell a house with a reverse mortgage. However, you need to keep in mind a few things as you make your move to a new place.
For starters, your mortgage will become due and payable as soon as you sell your house. You may use the funds from the sale to pay off the loan, which might be a lot due to the accrued interest on it. You may have to pay extra from your pocket if your loan amount is more than the sale price of your home. You can avoid this by taking out a non-recourse loan, which is the most popular type of reverse mortgage taken out. For example, the home equity conversion mortgage or HECM is a popular non-recourse loan that is also the only reverse mortgage backed by the federal government. With a non-recourse loan, you and your heirs are exempt from paying any amount of the loan that exceeds your home’s equity.
Even though you will not be prohibited from selling your home, but your bank may put a limit on how soon you can sell it after taking out your loan. Be sure to keep your lender updated about your plans to move so that you do not incur any legal implications for selling your home. Though you are allowed to pay back the loan at any time without any penalties, selling the home before a minimum time period may result in fines on the borrower. These fines are waived if the borrower has passed away and is reduced if the borrower apprises the lender of his intention to sell.
What Happens When I Sell My House With A Reverse Mortgage?
When you sell your house with a reverse mortgage, you trigger a maturity event and initiate the loan repayment phase of the mortgage. The steps involved in selling a house with a reverse mortgage are listed below:
Step 1: Contact Your Lender About Your Plans To Sell Your House
You will need information from your lender to make sure you are not selling the house prematurely. If the house is being sold because the borrower or the non-eligible spouse of the borrower has passed away, then you can sell the house as and when you need to. Letting your lender know about your plans is important as that triggers the maturity event.
Step 2: Activate The Maturity Event
Once your maturity event is activated, your lender will guide you about its starting date. In the case of the death of the borrower, the start date is the date the last non-eligible spouse passes away. If you are selling the house, the maturity event can start on the day the house goes up on the market or the day that the house is sold off. Knowing the date of the maturity event is important because the borrower or the heirs are to notify the lender about any changes to the property or the residents of the property within 30 days of the event. Delays can be charged with penalties.
Step 4: Knowing Your Loan Amount
After you have contacted your loan servicer and the maturity event has occurred, your loan servicer will send out a due and payable letter to you. This is the official notice sent to you confirming that the loan has ended and should be paid off soon. After sending the due and payable letter, the loan servicer will send an appraiser approved by the Federal Housing Authority to get an estimate of how much your house is worth on the market. Your loan amount will either be the total debt value that you owe to the lender or 95 percent of the appraised current value of your home, whichever is less. You are given 30 days to respond to the due and payable letter. The lender can move to a foreclosure if you fail to do so.
Step 5: Setup Your Repayment Plan
The repayment of the loan becomes due and payable right after the maturity event. However, lenders will give up to 6 months to the borrowers or their heirs to come up with a repayment plan for the mortgage. If borrowers need more time, they can get two extensions of three months each to come up with the payment. If you need more time, apply for the extension well in time for it to be approved by the lender.
Step 6: Sell the House And Distribute the Proceeds
Now that you have set the payment plan in place, you can move to sell the house. Unfortunately, the returns from the sale are seldom satisfactory. This is because you have to pay off the loan balance, which is the principal loan amount plus the interest that accrues on it over the years. Any mortgage insurance and closing costs are also added to the loan amount with interest. Since the interest keeps stacking on the loan over the years, sometimes it is possible that the loan amount surpasses the actual value of the house. However, the borrowers or their heirs are not responsible for paying off any deficiency balance. In fact, any surplus proceeds from the sale of the house go to the sellers of the house.
Is A Reverse Mortgage Ever A Good Idea?
For many people, a reverse mortgage is another source of income. This can be very misleading, especially for borrowers with dependants or heirs who are not financially stable. A reverse mortgage should rather be considered as a debt that has to be paid with interest and all at once after some time. It also brings down the amount you own in the house.
A reverse mortgage can be an expensive option for many people. However, it may be the only option for some people. It is also a good option for people who are not planning to leave their house to anyone. Additionally, if the reverse mortgage is fulfilling your financial needs in the long term, if you plan to stay in your home and not move into a nursing or treatment home or with your children in the near future, and if you can afford the running costs of your home like insurances and maintenance, then a reverse mortgage can be a very good idea.
A reverse mortgage does not give the ownership of the house to the bank or lender of the loan, hence homeowners can still sell it. They should just be prepared to make the loan repayment within 6 months to a year of selling the property. You should contact your lender or mortgage servicer as soon as you start planning the sale of the house.