What Happens to a Reverse Mortgage When You Die?

A reverse mortgage allows homeowners, typically aged 62 or older, to convert home equity into cash without monthly payments. Unlike a traditional mortgage, the loan balance grows and becomes due when the last borrower permanently leaves the home or dies. This article explains the process and options for heirs when a reverse mortgage matures due to the borrower’s death.

When the Loan Becomes Due and Payable

A reverse mortgage becomes due when a triggering event occurs, most commonly the death of the last borrower. Other triggers include the borrower permanently moving out, failing to pay property taxes or homeowner’s insurance, or not maintaining the property. The loan balance, including principal, accrued interest, and fees, must then be repaid.

For Home Equity Conversion Mortgages (HECMs), federally insured through the Federal Housing Administration (FHA), the loan is a “non-recourse” debt. This means heirs are not personally liable if the loan balance exceeds the home’s value. The lender’s only recourse is the home itself, protecting other estate assets. If the property’s sale price is less than the amount owed, FHA mortgage insurance covers the difference, preventing heirs from being burdened.

Following the death of the last borrower, the loan servicer sends a “Due and Payable” notice to the estate or known heirs. This informs them the loan has matured and outlines resolution options. Heirs should notify the lender promptly about the borrower’s death.

Choices for Heirs and Estate Representatives

Upon a reverse mortgage’s maturity, heirs or the estate have three choices to resolve the loan. These options offer flexibility based on the home’s value and the heirs’ desire to keep the property. Heirs are not personally responsible for the debt, and their credit is not affected by these decisions.

One choice is to repay the loan to keep the home. Heirs can pay the outstanding balance using their own funds, by refinancing, or through other estate assets. For HECM borrowers’ heirs, the “95% rule” applies. If the loan balance exceeds the home’s current market value, heirs can pay 95% of the appraised value or the full loan balance, whichever is less, to satisfy the debt and retain ownership. This rule ensures heirs will not pay more than the home is worth to keep it.

Alternatively, heirs can sell the home to satisfy the reverse mortgage. This is common if the home has equity remaining after the loan is paid. Sale proceeds first pay the reverse mortgage lender, with any remaining funds belonging to the estate and heirs. If the sale price is less than the loan balance, the non-recourse feature ensures heirs are not responsible for the difference, provided it’s a bona fide sale to an unrelated third party.

A third option is to allow the lender to take possession of the home. This can occur through a deed-in-lieu of foreclosure or by allowing the lender to initiate foreclosure. This path is chosen when the home’s value is less than the loan balance and heirs do not wish to keep or sell the property. Opting for a deed-in-lieu can be a quicker resolution than foreclosure, as it involves voluntarily transferring the property title to the lender.

Steps to Resolve the Reverse Mortgage

Resolving a reverse mortgage involves procedural steps after the loan becomes due. Heirs should communicate with the loan servicer to understand actions and deadlines. The lender’s initial notification provides about 30 days for heirs to decide.

If heirs repay the loan to keep the home, they must first obtain the payoff amount from the lender. An appraisal is required to determine the home’s market value, especially if the 95% rule applies. Heirs then arrange repayment, either through a new mortgage or with available funds, ensuring payment within the specified timeframe. This can be extended up to 12 months with lender and HUD approval.

To sell the home, heirs should contact the loan servicer. Lenders grant an initial period, usually six months, for the property to be sold. Extensions of three months, up to a total of 12 months, may be available if heirs demonstrate active efforts to sell. During this period, heirs or the estate are responsible for marketing and completing the sale, with proceeds paying off the reverse mortgage first.

If heirs allow the lender to take possession, a deed-in-lieu of foreclosure is an option. This involves signing the property deed over to the lender, avoiding the longer foreclosure process. Heirs should contact the servicer to arrange this, which requires the home to be free of other liens. This option prevents heirs from managing the sale or property maintenance.

What Happens if No Action is Taken

If heirs or the estate fail to take any outlined actions within specified timelines, the reverse mortgage lender will initiate foreclosure. This is how the lender recovers advanced funds. The foreclosure process follows state laws and can vary in length, taking several months to complete.

Even if foreclosure occurs, the non-recourse nature of the reverse mortgage means heirs are not personally liable for any deficiency if the home sells for less than the amount owed. The lender’s goal is to recoup their investment, not to acquire the property or pursue the borrower’s heirs for additional funds.

Foreclosure is the final step when other resolutions are not pursued or cannot be achieved. While lenders prefer to avoid foreclosure, it serves as the ultimate recourse to satisfy the loan if heirs are unwilling or unable to settle the debt through repayment or sale.