What happens to a reverse mortgage after death? Do the heirs get left with a big mess to clean up? Does the bank end up getting the house? Many homeowners are (rightfully) concerned about the legacy they’ll leave as a result of getting a reverse mortgage. Fortunately, the reverse mortgage is designed with both the homeowner and heirs in mind.
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. If you’d like more detailed reverse mortgage information than what we’ll cover here, check out this article.
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Reverse Mortgage Basics
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 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? 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
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.
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.
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.
It’s important to understand that the heirs do not lose out 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 the heirs repay the loan balance or sell the home.
Heirs shouldn’t neglect to inform the servicer when the last borrower or non-borrowing spouse passes away. Lender are subject to strict regulations from HUD, so they monitor various data sources for death notifications. The process of settling the loan balance begins based on the date of death, not the day the lender learns about the death.
A Normal Part of Settling a Reverse Mortgage Balance
Most people have a negative reaction to the word “foreclosure” – which is perfectly understandable. After all, most people associate foreclosure with missed payments, hard times, and families losing their homes.
Stripped of the emotional connotations, however, the word “foreclosure” simply refers to the sale of a home by a mortgage lender to repay a mortgage balance. This is true of both traditional forward mortgages and reverse mortgages. However, the difference is that foreclosure is a normal part of settling up reverse mortgages. A reverse mortgage foreclosure doesn’t necessarily mean the borrower fell on hard times and failed to meet their loan obligations.
Many reverse mortgage borrowers have no heirs. Or if they do, many heirs don’t want the home and don’t want to mess with selling the home. In such cases, the lender uses the foreclosure process to get their money back.
Don’t forget that 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. The heirs are not on the hook to cover the shortage if the home isn’t worth enough to settle the entire balance.
If you’d like to read further on this topic, the National Reverse Mortgage Lenders Association (NRMLA) has some good information at the following links:
You can find the HUD HECM lending guidelines here: