July 21, 2017 by HECM Pro
So, what happens to a reverse mortgage after death? This is one of the most common questions I hear from seniors who are considering getting a reverse mortgage. They’re concerned about what happens to a reverse mortgage after death and what it means for their home and heirs. Other seniors are worried that the reverse mortgage will create a big mess for their heirs to clean up.
Fortunately, the reverse mortgage is designed not only with seniors in mind, but their heirs as well.
Before I address this question and the concerns it implies, let me first go over some HECM reverse mortgage basics. Misinformation about the HECM is rampant, so I want to make sure you understand a few basics before addressing how a reverse mortgage works when you die.
HECM Reverse Mortgage Basics
The most common reverse mortgage in the United States today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If anybody you know recently got a reverse mortgage, it likely was a HECM.
If you’re 62 or older, the HECM reverse mortgage enables you to convert a large portion of your home’s value into cash without taking on a mortgage payment or giving up ownership of the home. The following are some notable features of the HECM program:
- No payments are required as long as at least one borrower is living in the home and paying required property charges.
- You remain the owner of the home and are free to will it to your heirs.
- Loan proceeds can be taken as lump sum, credit line, monthly term or tenure payments, or some combination of all of these.
- Loan proceeds are not subject to income taxes and do not impact Social Security or Medicare.
- The HECM is non-recourse. The most that will ever need to be repaid is the value of the home, even if it’s not worth enough to settle the balance.
- The HECM is insured and regulated by FHA.
Your obligations under the HECM program are to pay your property charges and live in the home. As long as at least one borrower is doing this, no monthly mortgage payments are required and the loan does not have to be repaid.
Note that there are other reverse mortgage products on the market and they may work differently than the HECM. The following information applies only to the HECM reverse mortgage.
What Happens to a Reverse Mortgage After Death?
Note that the following applies to HECM reverse mortgages with case numbers after August 4, 2014. There may be some slight variations in the treatment of HECMs originated before August 4, 2014 (mainly with regard to non-borrowing spouses).
So, what happens with a reverse mortgage after death? The answer depends on what your heirs want to do with the house.
As mentioned already, the HECM doesn’t need to be repaid as long as at least one borrower or eligible non-borrowing spouse (NBS) is paying the required property charges and living in the home. Once the last borrower or NBS dies, the reverse mortgage becomes due and payable. The lender orders an appraisal and notifies the heirs about three options to repay the reverse mortgage balance:
- Pay the balance and keep the property. The heirs can either refinance the balance or pay if off using other assets.
- Sell the home for at least 95% of the appraised value. The loan balance is paid off once the home is sold and the remaining equity goes to the heirs.
- Give the lender a Deed in Lieu of foreclosure. The lender will sell the property, pay off the loan balance, and give any remaining equity to the heirs.
If the heirs daily to repay the loan balance in response to the Due and Payable Notice, the lender is required by HUD to begin foreclosure proceedings.
If the heirs are trying in good faith to sell the home, without success, the lender may grant up to two 90-day extensions to postpone the foreclosure process.
Foreclosure is a Normal Part of Reverse Mortgages
The word “foreclosure” probably conjures up some pretty negative images in your mind. You may be picturing destitute families being forced onto the street as their home is sold on the courthouse steps. Does that sound about right?
Stripped of the negative connotations, the word “foreclosure” simply refers to the sale of a home by a mortgage lender to recover a mortgage balance. That’s true of both forward and reverse mortgages, but there’s a big difference for reverse mortgages: foreclosure is a normal part of settling up a reverse mortgage after death. Foreclosure doesn’t mean the borrower failed to meet the obligations of the loan or fell on hard times.
If the heirs have no desire to keep the home or hassle with selling it, the lender recoups their money via a foreclosure action: the home is sold, the reverse mortgage is paid off, and the remaining equity goes into the estate.
An Important Protection for the Heirs
Remember, the HECM reverse mortgage is a non-recourse loan. The lender’s only recourse for repayment is the home itself – even if the home isn’t worth enough to settle the entire loan balance. Your heirs are not on the hook to cover the shortage if the home isn’t worth enough to settle the entire balance.