There's more than one way to pay back a reverse mortgage

What happens to the house after the owners secure a reverse mortgage?

My answer to this question applies to the Home Equity Conversion Mortgage program (HECM) for senior citizens administered by HUD, with investors in the mortgages insured against loss by the Federal Housing Administration.

On the many private reverse mortgage programs that have come and gone over the years, the answers would be very different. The private programs have had many fewer consumer protections.

• Owner/borrower sells the house: In some cases, reverse mortgage borrowers change their minds about aging in place. They may decide to downsize, or move to a retirement community, or to a nursing home. In all such cases, they sell their existing home, which requires that they pay off the reverse mortgage balance. Once that is done, the net proceeds from the sale belong to them.

• Owner/borrower retains the house but repays the HECM: Occasionally, homeowners treat a reverse mortgage in the same way they treat a forward mortgage: they pay it off. There are no prepayment penalties on a HECM, so the borrower who wins a lottery can eliminate her debt with no hassle. They can also pay down the balance but leave the HECM in place in case they need to access it in the future.

• Borrower dies with significant equity in the house: When a HECM borrower dies, all known heirs receive a condolence letter from the servicer that tells them what their options are. If there is significant equity in the house (meaning that property value is well in excess of the HECM loan balance), the relevant option is to pay off the balance.

• Heirs want the house: In this case, the heirs acquire title by repaying the HECM loan balance. If the heirs keep the servicer informed regarding their intentions and their status, and document their intention to acquire the property, they may have up to a year to repay the balance. They have an incentive to move quickly, since interest and insurance premiums accrue until the loan is entirely paid off.

• Heirs don't want the house: This case is the same except that the heirs can obtain the funds needed to pay off the HECM by selling the house. The heirs will retain the difference between the HECM loan balance and the net sale proceeds.

• Borrower dies with a house that is underwater: If it is very clear that the reverse mortgage loan balance exceeds the value of the home, one option relevant to the heirs is to do nothing. This will trigger a foreclosure action by the servicer. In some cases, the heirs might be asked to complete a deed in lieu of foreclosure, but as far as the heirs are concerned, the result is the same. The borrower's estate is not in any way liable for the excess debt, which becomes a charge against the insurance reserve fund.

If the heirs want the house, they can get it without being stuck for the excess debt. HUD offers heirs the option of paying 95 percent of HUD appraised value, less closing costs and Realtor commission. For example, if the HECM debt is $200,000 but the HUD appraised value is only $100,000, HUD will accept $95,000 less documented costs.

• Borrower dies but leaves an eligible non-borrowing spouse: HUD made some rule changes beginning in 2014, designed to protect non-borrowing spouses (NBSs) from being forcibly evicted on the death of the borrowing spouse. These rules have weakened the position of the borrower's heirs in cases where the borrower has an eligible NBS. An eligible NBS is one who was less than 62 and married to the borrower when the reverse mortgage was taken out, remained married until the borrower died, and has lived in the home as her permanent residence.

The existence of an eligible NBS creates a deferral period of unknown length. So long as the surviving spouse pays the property taxes and insurance, she can remain in the property until she dies. Meanwhile, the HECM loan balance continues to increase. One potential heir I know, who has a parent looking to marry a much younger spouse before taking out a reverse mortgage, is talking up the benefits of a permanent liaison instead of marriage with that parent.

Thanks to Ryan LaRose of Celink, a HECM servicer.

• Contact Jack Guttentag via his website at mtgprofessor.com.

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