How the “Back End” of a Reverse Mortgage Works

Laurie MacNaughton and Neil Sweren © 2014

Realtors, home owners, and family members frequently have questions regarding how the “back-end” of a reverse mortgage (or HECM) works. The answer to the question depends upon whether the property with the reverse mortgage is underwater at the time the last person on title permanently vacates the home.

Selling the home if the house is NOT underwater

If the loan balance is less than the current property value, the sale is handled like any other home sale. There is nothing unusual about paying off a reverse mortgage with one exception: there are certain time constraints the lender MUST follow once the last person on title no longer occupies the home as his/her primary residence.

If the property is not underwater the reverse lender provides a written payoff statement. At closing, the loan balance is paid off – just as would be the case with any other mortgage.  After the loan is paid off, any and all remaining equity goes to the seller, which typically is the borrower’s heirs or estate.

Selling the home if the property IS underwater

If the loan balance exceeds the property value the process is a little different.

HECM payoffs are not negotiated like other short sales or short payoffs.  The lender must accept as satisfaction of the lien the first offer that is at least 95% of the home’s current appraised value.

HECM loans are non-recourse in nature, so the borrower and his/her estate CANNOT be held responsible for any shortfall.  This is true even if the borrower has millions in other assets.  The house repays what it can, and any shortfall is covered by the FHA insurance fund.

It is important to understand this is not a short sale, and that there is no negotiation required or permitted. The lender is prohibited by HUD from accepting less than 95% of the home’s appraised value.

What if the heirs want to keep the home?  

The lender does not care how the reverse mortgage is paid off, only that it is paid off. If the family desires to keep the property, the loan can be satisfied by refinancing or by paying off what’s due.

In an underwater situation, the 95% figure noted above holds true for family members who want to purchase the home: heirs can buy the home for 95% of the appraised property value – which is not the full loan amount.

Important note on time frames

It is important to note there are mandated time constraints placed upon the lender, and the clock starts ticking the day the last surviving borrower no longer occupies the property. Once the home is unoccupied, the borrower or his/her estate have six months to pay off the loan. In addition to the initial six months, up to two three-month extensions can be requested (for a total of one year) if more time is needed.

Extensions are not automatic; documentation that the home is listed for sale, a sale is pending, or that a family member is applying for financing on the home will be required in order for an extension to be granted.

Communication is key

The loan servicer should be contacted immediately once the home is vacant. Reverse mortgage servicers deal with “back-end” situations every day and help borrowers and family members through the process. However, they can’t help if they don’t hear from anyone. All reverse mortgage servicers send monthly loan statements to borrowers. Those statements contain all loan and contact information necessary to make contact with the lender.

If you have questions regarding an FHA-insured reverse mortgage, give me a call. I always love hearing from you.


Laurie MacNaughton [506562] is a freelance writer and Reverse Mortgage Consultant with Atlantic Coast Mortgage.

She can be reached at 703-477-1183 Direct or

6 thoughts on “How the “Back End” of a Reverse Mortgage Works

  1. Hi Laurie. You have some helpful information on your website! I realize HECM loans are non-recourse in nature, but do you know if there are any tax consequences on the amount of debt-forgiveness in an underwater reverse mortgage at the time of settlement?


    1. Hi Randy, thanks for your question. It doesn’t really lie within the province of a lender to weigh in on tax issues. However, your tax professional should readily be able to answer this.

      I will mention this, however: an underwater reverse mortgage and debt-forgiveness aren’t concepts that really belong in the same sentence. When you (or the homeowner) originated the reverse mortgage, the FHA insurance premium was paid specifically to protect the homeowner from incurring debt should the home get to the point of being underwater. It is the home that cannot repay the full loan amount; the homeowner is not technically in debt, and consequently s/he is not subject to debt forgiveness. And, it is of note that an underwater reverse mortgage will not appear as adverse credit on a credit report.

      Hope this helps!


      1. Excellent response. I will consult with a tax professional to see if they have documentation. Thank you for your advice.


    1. Kay,

      To answer your question I’m actually going to back up in order to add a bit of clarification.

      If the home DOES have equity left when the last title holder permanently leaves the home, the heirs sell the home (or refinance it into their own names) just as they would under any other scenario following the death of their last parent.

      The process works a little differently, however, if the home is underwater – meaning the home has gone down in value and is no longer worth as much as is due on the home.

      In this case, the lender will order an appraisal, and the first purchase contract that comes in within 95% of the appraised value is the contract that will be accepted.

      Remember, in this second scenario the home is underwater, so there is no equity to go to the heirs. HOWEVER, there is also no debt that gets passed on to the heirs.

      Unlike with an underwater “forward” loan, with a reverse mortgage the heirs do not have to worry about a short sale, nor are they on the hook for any shortfall if the home sells for less than is due on the loan.


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