Are Reverse Mortgages Assumable by Heirs?

A reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity into cash. Unlike a traditional mortgage, it does not require monthly mortgage payments to the lender. This financial tool is designed to provide funds, often to supplement income or cover expenses, while the borrower continues to live in the home. This article will clarify what happens to a reverse mortgage loan when the borrower passes away and whether it can be assumed by another party.

Understanding Reverse Mortgages and Assumability

A reverse mortgage is a loan secured by a home, where the lender makes payments to the homeowner, and the loan balance grows over time with accrued interest and fees. The most common type, a Home Equity Conversion Mortgage (HECM), is insured by the Federal Housing Administration (FHA). This structure differs significantly from a traditional mortgage, where a borrower makes regular payments to reduce the loan balance.

The concept of “assumability” refers to the ability of a new borrower to take over an existing mortgage loan with its original terms and interest rate. While some traditional mortgages may be assumable, reverse mortgages are generally not. HECMs, in particular, are structured such that they are not assumable by family members or other parties. The loan is tied to the original borrower’s occupancy and age, not designed to be transferred to new owners.

When a Reverse Mortgage Becomes Due and Payable

A reverse mortgage loan becomes “due and payable” upon the occurrence of specific events. The most common trigger is the death of the last surviving borrower or eligible non-borrowing spouse. When this occurs, the entire loan balance, including the principal advanced, accumulated interest, and fees, becomes immediately callable.

Other triggering events can include the home no longer being the borrower’s primary residence, such as if they permanently move out or reside in a healthcare facility for more than 12 consecutive months. The loan also becomes due if the property is sold or its title is transferred. Failure to meet loan obligations, such as paying property taxes, maintaining homeowners insurance, or keeping the property in good repair, can also cause the loan to become due.

Paths Forward for Heirs or the Estate

Once a reverse mortgage becomes due and payable, heirs or the estate typically have several options to address the outstanding loan. One option is to repay the loan balance, allowing the heirs to retain ownership of the property. This repayment can be made using personal funds, or by obtaining a new, traditional mortgage on the property.

Heirs may also choose to sell the property to satisfy the debt. In this scenario, the proceeds from the sale are used to pay off the reverse mortgage, and any remaining equity after the loan is satisfied goes to the heirs. If the loan balance exceeds the home’s value, a significant protection under HECMs is the non-recourse feature. This means heirs are generally not personally liable for the loan balance beyond the home’s value, protecting their other assets.

A specific provision for HECMs allows heirs to repay the loan at 95% of the home’s appraised value if the loan balance is higher than the property’s worth. This rule is a consumer protection built into federally backed reverse mortgages, ensuring heirs do not pay more than the property’s current market value. If heirs do not wish to keep or sell the property, they can provide the lender with a deed in lieu of foreclosure, transferring ownership directly to the lender to satisfy the debt and avoid a formal foreclosure process. If no action is taken, the lender will initiate foreclosure proceedings to recover the loan amount.

Key Steps for Heirs

Upon the death of a reverse mortgage borrower, heirs or the estate should contact the lender promptly and provide necessary documentation, such as a death certificate. Lenders typically issue a “Due and Payable Notice” to the estate within 30 days of being notified of the borrower’s death.

Heirs generally have an initial period, often around 30 days, to decide on a path forward, though extensions are common. Lenders may grant extensions, typically up to six months, and potentially two additional three-month extensions, allowing heirs up to a year to resolve the loan, especially if they are actively trying to sell the home. During this time, an appraisal of the home will be conducted to determine its current market value. This appraisal is crucial for applying the 95% rule, which allows heirs to pay off the loan at 95% of the appraised value if the outstanding balance exceeds the home’s worth.

The non-recourse nature of HECMs means that heirs are not personally responsible for any loan balance exceeding the home’s value, should they choose to sell or deed the property to the lender. This protection ensures that the debt is tied solely to the home itself, not to the heirs’ other assets. Heirs should understand these protections and timelines to make informed decisions regarding the property.