Do I Have to Pay Back My Reverse Mortgage
In short, yes. But only under certain conditions. A reverse mortgage, commonly referred to by lenders as a Home Equity Conversion Mortgage, or HECM. A reverse mortgage converts homeowner equity into cash to the owner. This cash can come in the form of a lump sum payment or arranged as a home equity line of credit, or HELOC. Or, a combination of both. But there can be some confusion about reverse mortgages that can lead some to think they don’t have to pay it back, ever. But they do.
Reverse mortgages are available to seniors aged 62 and older. There are a few basic requirements to obtain a reverse mortgage but these qualifications are relatively easy to meet. First, the borrowers must occupy the property as a primary residence and the property must be a single family home or a 2-4 unit property. With a 2-4 unit property or a duplex, the owner must live in one of the units. Reverse mortgages today are insured as an FHA loan. When someone applies for a HECM, they’re applying for an FHA loan.
There is very little qualification involved as well. The lender must make the determination there are enough funds coming in each month to take care of property taxes, insurance and maintenance while still leaving enough money available for everyday living expenses.
One might wonder why a reverse mortgage isn’t just the same thing as a home equity line of credit, or a HELOC. The main difference is a HELOC must be paid back with monthly payments. When applying for a HELOC, standard documentation will apply such as pay check stubs, W2 forms and federal income tax returns if someone is self-employed. With a reverse mortgage, no monthly payments are required during the time the owners occupy the property. During this time, interest accrues each month and is added to the outstanding loan balance. Reverse mortgages can come in both variable and fixed rate terms.
The loan becomes due in full once the last owner leaves the property. The home is then sold and the reverse mortgage loan is paid off in full. Reverse mortgages are also considered as “non-recourse.” This means when the home is sold and there aren’t enough loan proceeds to pay off the reverse mortgage in full, the lender must absorb the loss, not the heirs. The loss is covered by mortgage insurance. So, while there aren’t any payments required while the owners are occupying the property, there will be a payment made when the owners no longer live there. They can certainly make payments if they want during that time, but they’re not required to.
When you see an advertisement for a reverse mortgage and you see the phrase, “No payments needed for a reverse mortgage!” it’s really a bit misleading. There will be a payment, it’s just one big one when the previous owners no longer live there.