Before we dig into the answer, let’s first cover a few basics about what a reverse mortgage actually is. There is a ton of misinformation floating around out there about the program, so I want to set the record straight.
It’s a lot easier to understand what happens when a reverse mortgage borrower dies when you have at least a basic understanding of how a reverse mortgage actually works.
What is a reverse mortgage?
The most common reverse mortgage program in the United States today is the HECM, or home equity conversion mortgage. That HECM is a federally insured mortgage that gives seniors 62 or older access to a portion of their home’s value without taking on a mortgage payment or giving up ownership of the home.
The information we’ll cover here refers to the HECM. Other types of reverse mortgages could work differently.
As long as at least one borrower is living in the home and paying the required property charges, no mortgage payments are required on a HECM. The balance only has to be repaid when the last surviving borrower permanently leaves the home.
The HECM is a non-recourse loan, which means the most that will ever have to be repaid is the value of the home. If the home isn’t worth enough to settle the entire balance, FHA will pick up the shortage.
For more detailed information about how a HECM works, feel free to check out my article here.
What happens when a reverse mortgage borrower dies?
Note that the following applies to HECM reverse mortgages with case numbers issued August 4, 2014 or after. 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 when a reverse mortgage borrower dies? Well, the answer depends on which borrower we’re referring to and what the heirs plan to do with the home.
As I’ve already covered, the HECM doesn’t have to be repaid as long as at least one borrower or eligible non-borrowing spouse (NBS) is living in the home and paying the required property charges.
If one borrower passes and another borrower (or NBS) is living in the home, nothing changes with the reverse mortgage. The survivor gets to remain in the home as long as they continue paying the required property charges.
The reverse mortgage becomes due and payable in full once the last surviving borrower or NBS passes away. The lender will then order an appraisal of the home and issue a Due and Payable notice to the estate and/or heirs.
The Due and Payable notice offers three options for settling up the loan:
- Pay off the loan balance and keep the home. The heirs can pay off the balance with a refinance or other assets.
- Sell the property for at least 95% of the appraised value. Once the property sells, the reverse mortgage balance is paid off and the heirs keep any remaining equity. If the heirs are unsuccessfully trying in good faith to sell the home, they can request up to two 90-day extensions to push back the foreclosure process.
- Provide the lender with a Deed in Lieu of foreclosure. The lender will then sell the property, pay off the reverse mortgage, and give any remaining equity to the heirs.
Don’t forget that the HECM is a non-recourse loan. If the home isn’t worth enough to cover the entire loan balance, FHA will cover the shortage out of the mutual mortgage insurance fund.
Note that if the balance isn’t repaid in response to a Due and Payable Notice, the lender is required by HUD to begin foreclosure proceedings. That doesn’t mean foreclosure happens immediately, but the lender is required to at least get the ball rolling.
What “foreclosure” means in the reverse mortgage world
In the traditional “forward” mortgage world, the word “foreclosure” has some very strong emotional connotations. It usually means a borrower ran into financial hard times and is losing their home because they stopped making mortgage payments.
A reverse mortgage foreclosure can also mean that, yes. However, foreclosure is usually just the process by which a reverse mortgage is paid back once the last borrower passes away. A reverse mortgage foreclosure isn’t necessarily the result of a borrower failing to meet their program obligations.