Dealing With a Reverse Mortgage When the Owner Dies

Dealing with a reverse mortgage after the original owner passes away can be challenging for heirs. Reverse mortgages allow homeowners, typically seniors, to convert a portion of their home equity into cash without requiring monthly mortgage payments. This arrangement provides financial flexibility during the homeowner’s lifetime, but the loan must be settled once the borrower is no longer living in the home. This article guides heirs through the process, clarifying the steps and options available.

Initial Steps After the Borrower’s Passing

When the last surviving borrower of a reverse mortgage passes away, the loan becomes due and payable. This means the full loan balance, which includes the borrowed amount, accrued interest, and other charges, must be repaid. The responsibility for addressing this debt falls to the deceased borrower’s estate, not personally to the heirs, unless they decide to take action to keep the property. Heirs are not personally liable for the debt beyond the value of the home itself, thanks to the non-recourse nature of most reverse mortgages.

Heirs should promptly notify the reverse mortgage lender or servicer of the borrower’s death. This notification initiates the formal process and ensures that the estate remains compliant with loan terms. Heirs should contact the servicer using the phone number on the most recent loan statement. Gather key documentation for this initial contact, including a copy of the death certificate, the borrower’s name, and the loan number.

Following notification, the lender will typically send a “Due and Payable” notice to the estate, usually within 30 days. This notice formally informs heirs that the loan is now callable and outlines the available options for satisfying the debt. Heirs generally have a timeframe of 30 to 60 days for initial contact and to indicate their intentions, followed by up to six months to either repay the loan or sell the property. Extensions may be possible, potentially extending the total period to 12 months, especially if active efforts to sell or refinance are demonstrated.

Understanding Repayment Options for the Estate

The estate or heirs have distinct choices for addressing a reverse mortgage after the borrower’s death, each with specific financial implications. The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). This insurance provides important protections for heirs.

One option allows heirs to sell the home to pay off the reverse mortgage. If the home’s value is less than the loan balance, the “95% rule” comes into play. This rule dictates that heirs can typically satisfy the loan by paying 95% of the home’s appraised value or the current loan balance, whichever amount is less. The FHA mortgage insurance covers any shortfall between the sale price (if it’s at least 95% of the appraised value) and the full loan balance. If the home sells for more than the loan balance, the estate retains the remaining equity.

Another choice involves paying off the loan and keeping the home. Heirs can pay the full loan balance if it is less than the home’s value. If the loan balance exceeds the home’s value, heirs can still keep the property by paying 95% of the appraised value, leveraging the same FHA protection. This repayment can be made using personal funds or by obtaining new financing, such as a traditional mortgage, to cover the required amount. Heirs considering this path would need to meet the creditworthiness and lending requirements for a new loan.

A third option is for heirs to choose not to repay the loan or sell the property. In this scenario, the lender will typically initiate foreclosure proceedings to recover the debt. As an alternative to foreclosure, heirs might consider a “Deed in Lieu of Foreclosure.” This process involves voluntarily transferring the property’s deed back to the lender.

Executing the Chosen Repayment Strategy

Once a decision is made regarding the repayment strategy, heirs must follow specific procedural steps. Consistent communication with the reverse mortgage servicer is important.

If the decision is to sell the home, heirs should immediately notify the servicer. The process involves obtaining an appraisal to determine the home’s current market value, which is crucial for understanding potential equity or the application of the 95% rule. Heirs work with a real estate agent to list the property. During the closing process, the proceeds from the sale are used to satisfy the reverse mortgage, with any remaining funds going to the estate.

For heirs opting to pay off the loan and keep the home, the first step involves contacting the reverse mortgage servicer to obtain an accurate payoff statement. This statement details the exact amount required to satisfy the loan. If personal funds are used, these are transferred directly to the servicer. If new financing is needed, such as a traditional mortgage, heirs must apply for and secure this loan. The funds from the new mortgage would then be used to pay off the reverse mortgage.

Should heirs decide to allow the lender to take the property, they can choose to simply take no action, which will lead to the lender initiating foreclosure. Alternatively, heirs can pursue a Deed in Lieu of Foreclosure. This involves formally signing over the property’s deed to the lender. This option effectively transfers ownership and releases the estate from any further obligation related to the reverse mortgage.