How Does a Reverse Mortgage Loan Work When You Die?
If you are looking for servicing an existing reverse mortgage for your loved ones, visit this link.
Taking out a mortgage is one of life’s big decisions. If you are considering a reverse mortgage loan, you likely have a lot of questions around what a reverse mortgage is and how it works. At Fairway Independent Mortgage Corporation, we are here to help you and your loved ones to fully understand the features, benefits, and obligations of the reverse mortgage product.
Note: This article only refers to Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage.
Reverse Mortgage After Death
A question that homeowners who are considering a reverse mortgage often have is “What happens with my home should I pass away prior to paying off my reverse mortgage?”
We’ll walk you through what happens so you or your heirs can be prepared. But, before we do that, let’s take a step back and define what a reverse mortgage is.
A reverse mortgage is a loan that allows the borrower to convert a portion of their home’s equity into cash, while continuing to live in and own the home, and defer repayment until a later date.
The wording “later date” is purposely non-specific because that later date is only established when a maturity event occurs—and it is at that point (when the “maturity event” occurs) that the loan becomes due and payable in full. Maturity events that are common to HECMs are:
- The death of the last surviving borrower. (If a non-borrowing spouse is still occupying the home, he or she may have additional rights to remain in the home and defer repayment of the loan.)
- The sale of the property
- Permanently moving out of the home
- Failure to pay the property-related taxes, insurance, or HOA dues
- Not maintaining the home—allowing it to fall into major disrepair
It is important for any heirs to be aware of the reverse mortgage. When the last surviving borrower dies, which, in turn, makes the loan due and payable, the heirs should contact the loan servicer as soon as possible. The heirs will have a few different options based on what they want to do with the house and if the house has any equity left in it. Let’s take a closer look.
If the heirs DON’T want to keep the home, they can do the following.
Sell the home and keep any profit from the sale.
If there is still equity in the home—meaning the price that the home would sell for on the open market is greater than the reverse mortgage loan balance—selling the home can be a good route for the heirs to consider. If the heirs decide that they want to sell the home, they should notify the servicer of that decision right away. The heirs will then have up to six months to sell the home (in some cases, the U.S. Department of Housing and Urban Development [HUD] may grant additional time to the heirs to find a buyer).
Sign a deed-in-lieu of foreclosure.
If the reverse mortgage balance is higher than the value of the home, there would be no economic benefit to the heirs from selling the home on the open market. Instead, the heirs can sign a deed-in-lieu of foreclosure that allows them to turn the home over to the lender and walk away from it. Because a reverse mortgage is a non-recourse loan—meaning the home stands for the debt, not the borrower—the heirs will not be left with a bill. That’s right, the heirs will not be required to pay the difference between what’s owed on the reverse mortgage loan balance and the value of the home because the Federal Housing Administration (FHA) insurance will cover any remaining loan balance. Note: If the heirs choose this option, it will not affect their credit.
If the heirs DO want to keep the home, they can do the following.
Purchase the home for 95 percent of the property’s appraised value.
In situations where the reverse mortgage loan balance exceeds the value of home, the heirs can purchase the home with a short payoff of 95 percent of appraised value of the home. This would typically involve the heirs taking out a new traditional forward mortgage on the home.
Pay off the reverse mortgage balance.
In situations where the reverse mortgage loan is less than the value of the home, the heirs can pay off or refinance the loan balance in order to keep the home.
The Rights of Non-Borrowing Spouses
If a non-borrowing spouse—a spouse not named as a borrower in the original loan application—is still occupying the home after the death of the last surviving borrower, the non-borrowing spouse may have additional rights. Per new rules issued in August 2014 by HUD, after the last remaining borrower dies, an eligible non-borrowing spouse may be able to stay in the home and defer repayment of the reverse mortgage until they die or permanently move out. This is known as the deferral period. During the deferral period, the eligible non-borrowing spouse must still keep up with the obligations of the HECM, such as paying the property taxes.
It’s Wise to Plan Ahead
Preparing to handle a reverse mortgage after death—while it is certainly not the most pleasant subject to think about—is important. If you make plans for your heirs to take over your home (and thus the handling of the reverse mortgage repayment obligation) in your will, your heirs should know what their options are for keeping or letting go of the home, as well as their options for paying off the loan.
You’ve Got Questions—We’ve Got Answers
If you’re interested in learning more about this topic or others related to the HECM product, contact us today—our team of reverse mortgage planners will be happy to assist you. You can also check out answers online to the most frequently asked questions about reverse mortgages.