Before we dig into the answer, let’s first cover a few basics about reverse mortgages. There is a ton of misinformation around out there, so I want to set the record straight. Once we have the basics down, it will be easier to understand what happens when a reverse mortgage borrower dies.
What is a reverse mortgage?
The most common reverse mortgage in America is the HECM, or home equity conversion mortgage. The FHA-insured HECM gives seniors 62 or older access to a portion of their home’s value without a mortgage payment or giving up ownership of the home.
No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the required property charges. The balance becomes due and payable when the last borrower permanently leaves the home.
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 settle the entire balance.
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 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. It also depends on what the heirs plan to do with the home.
As already covered, no repayment is required as long as at least one borrower or non-borrowing spouse (NBS) lives in the home and pays the property charges. If one borrower passes away and the other borrower (or NBS) remains in the home, nothing changes.
The Due and Payable notice
The reverse mortgage becomes due and payable (called a maturity event) once the last surviving borrower or NBS passes away. The lender orders an appraisal and issues a Due and Payable notice to the estate and/or heirs. The Due and Payable details three options for settling the balance:
- 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 HUD requires lenders to begin foreclosure proceedings if the balance isn’t repaid once the Due and Payable Notice is issued. This doesn’t mean foreclosure happens immediately, but the lender is required to at least get things rolling.
What “foreclosure” means in the reverse mortgage world
In the traditional “forward” mortgage world, the word “foreclosure” has very strong emotional connotations. It usually refers to people struggling and losing homes because they can’t maintain their financial obligations. Foreclosure on a traditional mortgage is usually a bad thing.
Foreclosure in the reverse mortgage world is very different. It’s a normal part of settling a reverse mortgage once the last borrower passes away.
The word “foreclosure” simply refers to the process of selling a home to repay a mortgage balance.