What happens to a reverse mortgage after death? Do the heirs inherit a big mess? Does the bank get the house in the end? Many homeowners are (rightfully) concerned about the legacy they’ll leave. We’ll cover what happens to a reverse mortgage after death along with 3 critical deadlines the heirs need to be aware of.
Before I address these questions and the concerns they imply, let me first cover some basics. Reverse mortgage misinformation is rampant – especially with regard to this topic. Let’s make sure we set the record straight before addressing how a reverse mortgage works after death. If you’re already familiar with the basics, feel free to skip further into the article.
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What is a Reverse Mortgage and How Does it Work?
A reverse mortgage is a unique home loan that enables homeowners 62 and older to convert home equity into cash. The most popular reverse mortgage in America is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If you know somebody who got a reverse mortgage, it’s likely they got a HECM.
You always remain the owner of your home and you’re free to leave it to your heirs. Your heirs can inherit the remaining equity in the home (we’ll cover more details on that in a moment).
The HECM is a non-recourse loan; the most that will have to be repaid is the value of the home. FHA covers any shortage if your home isn’t worth enough to pay off the entire balance.
Other proprietary (or “jumbo”) reverse mortgage products are also available, but they’re typically designed for homeowners with home values north of $1 million. What we’ll cover here is relevant only to the HECM. Other reverse mortgage products could work differently.
What Happens to a Reverse Mortgage After the Borrowers Pass Away?
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 HUD reverse mortgage after death? This question has a few different answers, depending on the circumstances and what your heirs choose to do with the home. We’ll cover each of the possible scenarios in turn.
Two Borrowers, One Passes Away
If two borrowers (a married couple, for example) are on the loan but one passes away, nothing changes. The remaining borrower can remain in the home without a mortgage payment as long as they maintain the home and pay the required property charges.
Any unused proceeds will still be available to the surviving borrower. For example, if the reverse mortgage was structured as a tenure plan, the tenure payments continue for the surviving spouse. If the reverse mortgage was structured as a line of credit, the available credit will remain open and will continue to grow.
Again, nothing changes for the surviving spouse.
Borrower Passes Away, Non-Borrowing Spouse Still Living
A non-borrowing spouse (NBS) is a spouse who is not a full borrower on the reverse mortgage loan agreement. There are several reasons why a spouse might be a non-borrowing spouse, but the most common reason is age. The minimum qualifying age for a HECM reverse mortgage is 62.
The Department of Housing and Urban Development (HUD) made important changes to the HECM in April 2014 to better protect non-borrowing spouses. Prior to the change, only individuals over the age of 62 could be full borrowers on the reverse mortgage loan agreement. This created a big potential pitfall for spouses younger than 62 if the older spouse passed away. The death of the older spouse triggered a maturity event that made the loan balance due and payable in full. The younger spouse (who was not on the loan agreement) had to either pay off or refinance the loan balance or give up the home. Unsurprisingly, this led to some bad outcomes for non-borrowing spouses.
Fortunately, HUD has since resolved the issue. Today, non-borrowing spouses can take advantage of a so-called deferral period to remain living in the home if the older spouse passes away. The non-borrowing spouse can continue living in the home as long as they maintain it and pay the required property charges.
Though non-borrowing spouses “inherit” the protections built into the HECM, they do not receive any remaining funds in the HECM. Any remaining term/tenure payments are discontinued and/or any available line of credit is closed when the older spouse passes away.
All Borrowers And/Or Non-Borrowing Spouses Pass Away
So, how does a reverse mortgage work after death for all borrowers? What happens if you inherit a house with a reverse mortgage? Who is responsible for repaying the reverse mortgage after death?
Again, the reverse mortgage balance is due and payable in full once the last borrower or non-borrowing spouse passes away. You may have heard the rumor that the bank gets the house in the end, but this simply is not true. The heirs have the option to keep the home if they wish. Remember, mortgage lenders are in the business of lending money, not acquiring homes. The lender’s goal is to get its money back, not end up with the home in the end.
Once the servicer learns that all borrowers and/or non-borrowing spouses have passed, it will issue a Due and Payable notice to the heirs. The servicer may also order an appraisal to determine the current market value of the home. The heirs can also request their own appraisal at their own expense.
The heirs will have a few different options to settle the reverse mortgage balance:
- Pay the lesser of the loan balance or 95% of the appraised value to keep the home. The heirs can settle the loan balance by refinancing or using other assets such as savings or life insurance proceeds.
- Sell the property, repay the balance, and keep the remaining equity. The sale process works just like it would with any other type of mortgage. You hire a real estate agent (or sell it yourself, if you prefer), sell the house, and repay the loan balance once the sale closes. Any remaining equity goes into the estate.
- Give the lender a Deed in Lieu of foreclosure. The heirs sign the deed over to the servicer and the servicer sells the property and repays the loan balance.
- Do nothing. The lender uses the foreclosure process to sell the property and repay the loan balance.
HUD requires the lender to begin foreclosure proceedings if the heirs do not repay the balance in response to the Due and Payable Notice. Foreclosure must begin within 90 days, but no sooner than 30 days after the issuance of the Due and Payable Notice.
How Long Do You Have to Pay Off a Reverse Mortgage After Death?
I’ve heard and read conflicting information about the initial timeframe the heirs have to settle the loan balance and keep the property. Some say the initial time window is 90 days. Others say six months. The ambiguity probably means servicers have some flexibility here. I think it’s safe to assume that the heirs have as much as six months to repay the loan and keep the property.
Of course, keep in mind that the servicer must start foreclosure by the 90-day mark. If the foreclosure process moves quickly, it may be done before six months have passed. It’s in the best interests of the heirs to repay the loan balance as quickly as possible if they intend to keep the home. It’s also in the best interests of the heirs to be in regular communication with the servicer about their intentions.
How Long Do You Have to Sell the Home?
If the heirs plan to sell the home, they have an initial time window of six months to do so. If the heirs are diligently trying to sell the home, but are unsuccessful, they can request up to two 90-day extensions to push back foreclosure. In other words, the heirs could have as long as a year to sell the home before HUD requires the lender to foreclose.
How Does a Reverse Mortgage Company Know When Someone Dies?
Servicer typically learn that the last borrower or non-borrowing spouse has passed away in two ways:
- The heirs notify the servicer.
- The servicer learns of the death through various data sources.
Heirs shouldn’t neglect to inform the servicer when the last borrower or non-borrowing spouse passes away. Servicers are subject to strict regulations from HUD, so they monitor various data sources for death notifications. It’s important for the heirs to be proactive and keep the servicer informed of what’s going on.
Does a Reverse Mortgage Go Through Probate?
Probate is the legal process by which the assets of a deceased person are reviewed and the heirs determined. Depending on the laws of the state in which the home is located, how the estate is set up, and whether or not there is a will, trust, etc., it’s possible that a home with a reverse mortgage could go through probate. We recommend consulting with a competent legal authority if you have questions about your particular situation.
3 Critical Deadlines for Heirs
We’ve already covered this in the previous section, but I want to recap it in a more concise format for the heirs who are reading this. There are three important deadlines that apply to a reverse mortgage after death:
- 90 Days: If you want to keep the home, you need to pay off or refinance the balance within 90 days. Again, there’s some ambiguity in the requirements, so servicers may have some flexibility on this. Lenders are required to start foreclosure proceedings within 90 days as well.
- 6 Months: If you plan to sell the home, you have an initial window of 6 months to complete the sale.
- 12 Months: If you plan to sell the home, but haven’t been successful in the first 6 months, the servicer has leeway to grant up to two 3-month extensions. However, if the home isn’t sold by 12 months, the lender is required by HUD to proceed with foreclosure.
The heirs also have the option of doing nothing. If the heirs don’t want the home and don’t want to mess with selling it, they can let the lender sell it.
A Few Final Thoughts For Heirs
If you’ve inherited a home with a reverse mortgage, It’s important to understand that you do not lose out on the house simply because the lender begins foreclosure proceedings. HUD requires lenders to being foreclosure by a certain date, but it doesn’t mean foreclosure is a done deal. The foreclosure process stops once you repay the loan balance or sell the home.
However, we recommend that you be in constant communication with the servicer. You want to make sure the servicer understands your intentions for the home and is updated regularly on your progress and as you work to pay off the balance or sell the home.
Don’t forget that you also have the option to let the lender handle the sale and repay the reverse mortgage as well. If you don’t want the home and don’t want to hassle with selling, you can let the lender handle it.
Also don’t forget that the HECM reverse mortgage is a non recourse loan. The most that will ever have to be repaid is the value of the home. If the home isn’t worth enough to pay off the entire balance, FHA will cover the shortage.
Hopefully this sheds some light on the process of repaying a reverse mortgage after death. Hopefully it also eases your mind that you have options and reasonable timeframes to work within as you decide what to do with the home.
Who is responsible for reverse mortgage after death of all borrowers?
The home goes to the heirs after the last borrower or non-borrowing spouse passes away. The heirs can keep the home by paying off or refinancing the reverse mortgage, or they can sell the home, pay off the reverse mortgage, and keep the remaining equity.
How long after a death do you have to settle a reverse mortgage?
If you plan to keep the home, you have 90 days to pay off or refinance the reverse mortgage. If you plan to sell the home, you have six months with two possible 3-month extensions to 12 months.
Can you inherit a house with a reverse mortgage?
Absolutely! If you want to keep the home, you’ll need to pay off or refinance the reverse mortgage balance. If you don’t want the home, you can sell it, repay the reverse mortgage, and keep the remaining equity. You can also let the lender sell the home.
Can heirs refinance a reverse mortgage?
Absolutely! If the heirs wish to keep the home, they can refinance for the lesser of the reverse mortgage balance or 95% of the appraised value.
Can a family member take over a reverse mortgage?
Reverse mortgages are not assumable loans, so a family member who is not on the original reverse mortgage loan agreement cannot take it over.
What happens if I inherit a house with a reverse mortgage?
If you want to keep the home, you’ll need to pay off or refinance the reverse mortgage balance. If you don’t want the home, you can sell it, repay the reverse mortgage, and keep the remaining equity. You can also let the lender sell the home.
How long do you have to sell a house with a reverse mortgage after death?
The heirs have an initial window of 6 months to sell the home with two possible 3-month extensions.