What Happens to a Reverse Mortgage When You Die?
Unpack the process and options for a reverse mortgage after the borrower's death, ensuring clarity for heirs and the estate.
A reverse mortgage allows homeowners, typically those aged 62 or older, to convert a portion of their home equity into cash without selling their property. Unlike traditional mortgages, borrowers do not make monthly payments to the lender. Instead, the loan balance grows over time as interest and fees are added, with repayment generally deferred until a specific event occurs, such as the borrower no longer living in the home as their primary residence. This financial tool can provide funds as a lump sum, regular monthly payments, or a line of credit.
When a Reverse Mortgage Becomes Due
A reverse mortgage becomes due when certain “maturity events” occur. The most common trigger is the death of the last surviving borrower or eligible non-borrowing spouse. The loan also becomes due if the home ceases to be the principal residence for 12 consecutive months, such as if the borrower moves to a nursing home or another permanent residence.
Other events that can cause the loan to become due include the sale of the property, transfer of the home’s title, or failure to meet loan terms. These terms require the borrower to pay property taxes, maintain homeowner’s insurance, and keep the home in good repair. If these conditions are not met, the lender may call the loan due.
Repaying the Reverse Mortgage
Upon a maturity event, the estate or heirs have options to satisfy the reverse mortgage debt. Home Equity Conversion Mortgages (HECMs), the most common type, are “non-recourse.” This means heirs are never personally liable for the debt beyond the home’s value, protecting their other assets. If the loan balance exceeds the home’s value, Federal Housing Administration (FHA) insurance covers the shortfall for the lender.
One common option for heirs is to sell the home to repay the loan. They typically have six to twelve months to complete the sale. If the sale price is greater than the loan balance, heirs keep the remaining equity. If the sale price is less, the non-recourse feature ensures they are not responsible for the difference.
Alternatively, heirs can pay off the reverse mortgage and keep the home. They would pay the lesser of the outstanding loan balance or 95% of the home’s appraised value. For example, if the loan balance is $300,000 but the home is appraised at $250,000, heirs can pay 95% of the appraised value ($237,500) to keep the home. This “95% rule” allows heirs to retain the property even if the loan balance has grown significantly.
A third option, if heirs do not wish to sell or pay off the loan, is to complete a deed in lieu of foreclosure. This involves voluntarily transferring the home’s title to the lender, avoiding a formal foreclosure process. This can be a simpler way to resolve the debt if there is no equity for the heirs or they prefer not to manage the sale.
Considerations for Spouses and Heirs
Rights and obligations regarding a reverse mortgage after the borrower’s death vary based on the surviving family member’s status. If a spouse was a co-borrower, the loan does not become due upon the death of the first borrower. The surviving co-borrower can continue to live in the home and receive any remaining loan disbursements as long as they meet the loan terms, such as paying property taxes and insurance. The loan only becomes due when the last co-borrower dies or permanently vacates the property.
For HECM loans, specific provisions exist for an “eligible non-borrowing spouse” (ENBS). An ENBS can defer repayment and remain in the home without the loan becoming due, even if they were not a co-borrower. To qualify, the ENBS must have been married to the borrower at loan closing, occupied the home as their principal residence, and continue to meet all loan terms, including property charges. While an ENBS can stay in the home, they cannot receive additional loan proceeds or disbursements.
Other heirs, such as adult children or other relatives who were not co-borrowers or eligible non-borrowing spouses, do not have an automatic right to remain in the home. Their options are limited to those outlined for repayment: selling the property, paying off the loan, or allowing the lender to take possession through a deed in lieu of foreclosure. They must address the loan promptly after the borrower’s death, as the loan becomes due and payable for them.
Navigating the Post-Death Process
After the death of the last borrower, heirs or the estate administrator should promptly notify the reverse mortgage lender. The lender will require a death certificate to formally acknowledge the maturity event.
Following notification, the lender will send a “Due and Payable Notice” to the estate, outlining available options and deadlines. Heirs generally have 30 days to decide on a course of action, with potential extensions. They often have an initial six months to sell the home or repay the loan, with the possibility of two three-month extensions, providing up to a year to resolve the debt.
If heirs choose to pay off the loan at 95% of the appraised value, an independent appraisal of the home will be required to determine its current market value. If no action is taken by the heirs within specified timelines, or if loan terms are not met, the lender will initiate foreclosure proceedings to recover the outstanding balance. Even in a foreclosure, the non-recourse feature protects heirs from personal liability beyond the home’s value.