What Happens to a House With a Reverse Mortgage When the Owner Dies?

A reverse mortgage allows homeowners, typically those aged 62 and older, to convert a portion of their home equity into cash. Unlike a traditional mortgage where the homeowner makes monthly payments, with a reverse mortgage, payments are not required as long as the borrower lives in the home as their primary residence. The loan balance grows over time with accrued interest and fees, becoming due and payable when the last borrower dies or permanently moves out of the home.

Choices for Heirs

Upon the death of the last reverse mortgage borrower, the loan becomes due and payable, prompting heirs to make decisions regarding the property. Heirs are not obligated to continue living in the home under the loan terms. They have distinct options to resolve the reverse mortgage debt, none of which require them to personally take on the debt.

One option allows heirs to keep the home by paying off the reverse mortgage loan. To do this, they must repay the lesser of the outstanding loan balance or 95% of the home’s current appraised value. If the loan balance is higher than the home’s value, this 95% rule ensures heirs do not pay more than the home is worth to retain it. This repayment can be made using personal funds, by securing new financing, or through other available assets.

Alternatively, heirs can choose to sell the home to satisfy the reverse mortgage debt. The proceeds from the sale are used to repay the loan, and any remaining equity after the loan is paid off belongs to the estate and is distributed to the heirs. If the sale price is less than the loan balance but at least 95% of the appraised value, it can still satisfy the debt.

If heirs do not wish to keep or sell the home, they can deed the property back to the lender. This process, known as a deed in lieu of foreclosure, transfers ownership of the property to the lender. This option is used when the loan balance significantly exceeds the home’s value, and heirs prefer to avoid the complexities of a sale or foreclosure process.

Navigating the Repayment Process

Addressing a reverse mortgage after the homeowner’s death involves several procedural steps for the heirs or the estate’s representative. The initial action involves promptly notifying the reverse mortgage servicer of the homeowner’s passing. This notification requires providing the borrower’s name and date of death, along with contact details for the estate or heirs.

Following notification, the lender will request documentation to acknowledge the death and communicate with authorized parties. Required documents include a certified copy of the death certificate and proof of heirship or executor status, such as a will, letters of administration, or letters testamentary. Providing these documents ensures the lender can communicate with the correct individuals responsible for the estate.

Lenders issue a “due and payable” notice to the estate within 30 days of being notified of the borrower’s death. Heirs have an initial period of six months to decide on an option and take action to repay the loan. This timeframe can be extended, with up to two 90-day or three-month extensions granted, allowing for a total repayment period of up to 12 months.

If heirs decide to keep the home, they will need to obtain a payoff statement from the lender and arrange for the loan’s repayment, which may involve securing a new mortgage or using other financial resources. The title to the property will then be transferred to the heirs.

For heirs opting to sell the home, the process involves listing the property. An appraisal will be conducted to determine the home’s current market value for applying the 95% rule. During closing, the sale proceeds are directed to the lender to satisfy the reverse mortgage, with any surplus distributed to the estate.

Should heirs choose to deed the home to the lender, they will sign specific documents to formally transfer the property’s title. This option means no further action is required from the heirs once the deed is transferred. The lender then handles the property’s disposition.

Financial Implications for the Estate

Reverse mortgages are non-recourse, which impacts the estate and heirs. This means that heirs are not personally responsible for any loan balance that exceeds the home’s value at the time of repayment. The lender’s recourse for repayment is limited solely to the home itself, protecting the borrower’s other assets and the heirs from personal liability for any shortfall.

This protection is due to mortgage insurance, provided by the Federal Housing Administration (FHA) for Home Equity Conversion Mortgages (HECMs). If the loan balance is higher than the home’s value when the loan becomes due, the FHA insurance covers the difference, shielding the lender from losses and ensuring heirs are not burdened with the deficit.

The handling of home equity varies depending on the property’s value relative to the outstanding loan. If the home sells for an amount greater than the outstanding reverse mortgage balance, the remaining equity belongs to the deceased homeowner’s estate. This surplus is then distributed to the heirs in accordance with the deceased’s will or applicable state intestacy laws.

Conversely, if the loan balance exceeds the home’s value, heirs are not responsible for the difference due to the non-recourse provision. In such cases, the lender absorbs the loss, covered by the FHA mortgage insurance. Heirs can still choose to sell the home for 95% of its appraised value to satisfy the loan, even if that amount is less than the full loan balance.

Heirs may incur certain costs during the process, regardless of their chosen option. These can include appraisal fees to determine the home’s value, real estate commissions if the property is sold, and legal fees for estate administration or title transfers. These expenses can reduce the net proceeds available to the estate.