How Does a Reverse Mortgage Work After Death?

A reverse mortgage allows homeowners, aged 62 and older, to convert a portion of their home equity into cash while retaining ownership of the property. This loan differs from a traditional mortgage as it does not require monthly payments from the borrower. Instead, the loan balance grows over time as interest and fees are added, and funds can be received as a lump sum, monthly payments, or a line of credit. The home serves as security for the loan, enabling access to equity without immediate sale.

When the Loan Becomes Due and Payable

A reverse mortgage loan becomes due and payable when certain events, known as maturity events. The most common triggering event is the death of the last surviving borrower. Other events include the borrower permanently moving out of the home, selling the property, or failing to meet loan obligations such as paying property taxes, homeowners insurance, or maintaining the home. When a maturity event occurs, the full loan balance, including accrued interest and fees, must be repaid.

A key feature of most reverse mortgages, especially Home Equity Conversion Mortgages (HECMs) insured by the FHA, is their non-recourse nature. This means heirs are not personally liable for the loan balance if it exceeds the home’s value. The debt is secured by the property itself, protecting other estate assets. Heirs typically have 30 days to notify the servicer of their intent, followed by six to twelve months to settle the loan, with possible extensions.

Responsibilities of Heirs or Estate

Upon the death of the last surviving borrower, responsibilities fall to the heirs or the estate administrator. Notifying the reverse mortgage servicer about the borrower’s passing is a primary action. This requires submitting a death certificate and other documents, such as a will or probate documents, to establish legal standing. The servicer will then issue a “Due and Payable” notice, which outlines the current loan balance and available options.

Heirs should gather information from the servicer, including the current loan balance and any outstanding liens. Understanding these specifics is necessary for evaluating the situation and making informed decisions. It is important to verify if there is a surviving non-borrowing spouse, as their rights can impact the loan’s due and payable status. For HECM loans originated after August 2014, eligible non-borrowing spouses may have the right to remain in the home and defer repayment under specific conditions, provided they continue to meet loan obligations like paying property taxes and insurance.

Options for Settling the Loan

Once a reverse mortgage becomes due and payable, heirs or the estate have several options to settle the loan. One option is to pay off the loan balance in full, using personal funds, other estate assets, or by refinancing the property. If heirs choose to keep the home, they must repay the loan amount or 95% of the home’s appraised value, whichever is less, particularly if the loan balance exceeds the property’s value.

Another approach is to sell the home to repay the reverse mortgage. If the home’s value exceeds the loan balance, the heirs can sell the property, use the proceeds to pay off the loan, and keep any remaining equity. A key protection for heirs is the “95% rule” associated with FHA-insured HECMs. This rule allows heirs to sell the home for at least 95% of the appraised value, even if the outstanding loan balance is higher, with the FHA mortgage insurance covering any shortfall. Heirs typically have six months to complete the sale, with possible extensions granted by the lender or HUD.

If heirs do not wish to keep or sell the home, a third option is a Deed in Lieu of Foreclosure. This involves transferring ownership directly to the lender to satisfy the debt. This provides a more straightforward alternative to foreclosure, allowing heirs to avoid its complexities and potential duration. This option is particularly relevant when the loan balance is close to or exceeds the home’s market value, as it allows heirs to walk away without personal liability.

What Happens if the Loan is Not Settled

If heirs or the estate do not pursue one of the settlement options or meet required timelines, the reverse mortgage lender will typically initiate foreclosure proceedings. The loan’s non-recourse nature means that even in foreclosure, heirs’ personal assets are protected, and they will not be held personally liable for any deficiency if the sale price does not cover the full loan balance. The primary consequence of inaction is the loss of the property.

The foreclosure timeline and process vary by state, but lenders generally send notices, including a “Demand Letter” and potentially a “Notice of Intent to Foreclose.” Lenders are often required to begin foreclosure actions within a certain timeframe, typically six months after the loan becomes due and payable, if no other resolution is reached. During this process, the home may eventually be sold at a public auction. While lenders prefer to avoid foreclosure due to its time and cost, it is the mechanism by which they recover the loan balance if other settlement options are not exercised.