So, how does a reverse mortgage work when you die? This is a very common question from seniors considering a reverse mortgage. Many seniors want to know what happens to their home after they pass away and who gets the equity in the home. Others are concerned about the reverse mortgage creating hassles and headaches for their heirs. Fortunately, the reverse mortgage is designed not only with seniors in mind, but also their heirs.
Before I address question how does a reverse mortgage work when you die?, let me first cover some basics about the HECM reverse mortgage. There is a ton of misinformation about the HECM out there, so I want to make sure we’re on the same page before digging into how a reverse mortgage works when you die.
HECM Reverse Mortgage Basics
The most common reverse mortgage product in the United States today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, it very likely was a HECM.
If you’re 62 or older, the HECM reverse mortgage is designed to give you the ability to convert a large portion of your home’s value into tax-free cash without taking on a mortgage payment or giving up ownership of the home. As long as you live in the home and pay the required property charges (property taxes, homeowner’s insurance, etc.), no monthly payments are required and the loan balance does not have to be repaid.
You always retain title ownership of your home, which means you’re also free to leave it to your heirs.
Proceeds can be received in the form of a lump sum, line of credit, term or tenure payments, or some combination of all of these. Proceeds are commonly used to do home improvements, supplement income, supplement retirement assets, or get rid of mortgage or other debt payments.
Note that there are other reverse mortgage products on the market that may work differently than the HECM. The information that follows applies only to the HECM reverse mortgage.
How Does a Reverse Mortgage Work When You Die?
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, how does a reverse mortgage work when you die? Well, the answer to this depends on what your heirs wish to do with the home.
As noted already, a HECM reverse mortgage does not 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. Once the last borrower or NBS passes away, the reverse mortgage becomes due and payable. The lender will order an appraisal of the property and notify the estate or heirs that they have three options to settle up the loan balance:
- Repay the reverse mortgage balance and keep the property. This can be accomplished by refinancing the balance or paying it off with other assets.
- Sell the property for at least 95% of the appraised value. Once the home is sold, the reverse mortgage is repaid and the remaining equity goes to the heirs.
- Provide the lender with a Deed in Lieu of foreclosure. The lender sells the property, pays off the reverse mortgage, and any remaining equity goes to the heirs.
If the reverse mortgage isn’t repaid in response to a Due and Payable Notice, the lender is required by HUD to begin foreclosure proceedings.
If the heirs are actively and in good faith trying to sell the home, but are unsuccessful, they can request up to two 90-day extensions to push back the foreclosure process.
About that “Foreclosure” Thing
When you hear (or read) the word “foreclosure”, I imagine it conjures up some pretty negative images in your mind. You may be picturing families hit with hard times, falling behind on mortgage payments, and being forced onto the street as their home is sold on the courthouse steps. Does that sound about right?
Stripped of the negative connotations, “foreclosure” simply means the sale of a property by a lender to recover a mortgage balance. That’s true of forward and reverse mortgages. The big difference is this: foreclosure is a normal part of settling up a reverse mortgage after the last borrower or NBS dies. It doesn’t mean the borrower fell on hard times or failed to meet the obligations of the loan. If the heirs don’t want to keep the home or sell it on their own, the lender will sell it through a foreclosure action and repay the loan balance.
An Important Protection for the Heirs
Remember, the HECM reverse mortgage is a non-recourse loan. That means the only recourse available to the lender to repay the loan is the home. If for some reason the home isn’t worth enough to settle the entire balance, FHA steps in to cover the shortage out of the mortgage insurance fund. The heirs are never on the hook to repay the shortage if the home isn’t worth enough to settle up the entire loan balance.