What does Settling the Loan Account mean in a Reverse Mortgage?
Settling the Loan Account is a term used in the Reverse Mortgage process to describe the phase during which the Reverse Mortgage is paid off, or “settled.”
With a Reverse Mortgage, the homeowner does not have to make monthly mortgage payments to the lender. Instead, the lender issues payments to the homeowner. This money does not have to be paid back until/unless one of the following events takes place:
- The last remaining homeowner on the mortgage dies.
- The last remaining homeowner on the mortgage no longer uses the home as his/her primary residence.
- The homeowner(s) neglect to pay their property taxes and/or homeowners insurance.*
*This event could but may not necessarily cause the Reverse Mortgage to become due and payable. Talk to your Reverse Mortgage loan professional for details.
The events listed above (with the exception of the last one) are called “maturity events.” Once the Reverse Mortgage loan servicer has verified that a maturity event has occurred, they will send a “Due and Payable” notice within 30 days to the surviving homeowner or his/her heirs to inform them that the loan must now be repaid. The payment is due immediately, but the estate is usually given a six-month grace period to satisfy the debt.
The Due and Payable notice will typically include several options for repaying the loan.
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Selling the Home
The surviving spouse, heirs or estate of the homeowner can sell the property and use the proceeds of the sale to pay off the loan. If the home does not sell for enough money to adequately settle the debt, the heirs are not held financially responsible. Instead, the lender can claim it as a loss and may request reimbursement from the FHA.
Requesting an Extension
If the home is listed for sale and is still on the market after six months, the estate can request a 90-day extension, subject to approval by HUD. Up to two 90-day extensions can be requested.
Buying the Home as an Heir
The heirs can choose to purchase the property for 95 percent of its current appraised value. If any equity remains after the sale of the home, it belongs to the heirs.
If the initial Due and Payable notice is not responded to, or the home fails to sell after the 90-day extensions have been expired, or if the borrower has no heirs or estate to help pay off the loan, the Reverse Mortgage loan servicer can begin the foreclosure process on the home.
Keep in mind that the Reverse Mortgage proceeds will cease at the time of a maturity event; however, interest, mortgage insurance and homeowners insurance can continue to accrue until the loan is settled.
If you find yourself having to handle a Reverse Mortgage settlement, the best thing you can do is work closely with the loan servicer to ensure you understand your options.