What Happens to a Reverse Mortgage When You Die?

A reverse mortgage allows homeowners aged 62 or older to convert a portion of their home equity into cash. Unlike a traditional mortgage, borrowers generally do not make monthly payments. The loan becomes due when the last borrower permanently leaves the home, including upon death. Understanding this process is important for an estate and heirs. This article guides readers through the steps and options available.

Initial Steps After Death

Upon the death of a reverse mortgage borrower, the estate or heirs must promptly notify the lender. This initial communication formally initiates the process of settling the loan. Lenders typically require specific documentation to verify the borrower’s passing and identify the legal representatives of the estate.

The required documents usually include a certified copy of the death certificate. Lenders will also ask for proof of heirship or executorship, such as letters testamentary or letters of administration. Providing accurate contact information for the estate’s representative or the heirs is necessary for ongoing communication regarding the loan.

Understanding Loan Repayment

A reverse mortgage loan becomes due and payable when the last borrower dies or no longer uses the property as their primary residence. The total amount due includes the original loan amount, accumulated interest, and any associated fees. This repayment obligation falls upon the borrower’s estate, not the individual heirs personally.

Most reverse mortgages, particularly Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration (FHA), are non-recourse loans. This means that the debt is generally satisfied by the value of the home itself, and heirs are not personally liable for any loan balance that exceeds the home’s value. The home serves as the sole collateral for the loan, protecting other assets of the estate or the heirs from being used to cover any shortfall.

Available Options for Heirs

Heirs of a reverse mortgage borrower have several distinct choices for settling the loan.

Selling the Home

One common option involves selling the home to repay the outstanding loan balance. If the sale price exceeds the amount owed, the remaining equity belongs to the estate and is distributed among the heirs.

Refinancing the Loan

Another option for heirs who wish to retain the property is to refinance the reverse mortgage into a traditional mortgage. This requires the heirs to qualify for a new loan in their own names, based on their creditworthiness and income. For FHA-insured HECM loans, heirs can repay the loan at 95% of the home’s appraised value, even if the loan balance is higher, to keep the property.

Surrendering the Home

Heirs can also choose to surrender the home to the lender if they do not wish to sell it or refinance the loan. In this scenario, the heirs can provide a deed in lieu of foreclosure, effectively returning the property to the lender. Because of the non-recourse feature of reverse mortgages, the heirs will not incur personal financial liability for any difference between the loan balance and the home’s value when surrendering the property.

Addressing Loan Balance Exceeding Home Value

A common concern arises when the reverse mortgage loan balance surpasses the home’s market value at the time of the borrower’s death. Due to the non-recourse nature of these loans, heirs are not personally responsible for paying the difference. This protection is a significant benefit, especially for FHA-insured HECM loans.

For HECM loans, the FHA’s mortgage insurance covers any shortfall between the loan balance and the home’s sale price or 95% of its appraised value. This means heirs can choose to repay the loan at 95% of the home’s appraised value, even if the actual loan balance is higher, to keep the property. Alternatively, they can simply allow the lender to take possession of the home without personal financial consequence.

Key Timelines and Deadlines

After a reverse mortgage borrower’s death, specific timelines govern the process of settling the loan. Lenders typically issue a “Due and Payable” notice within 30 days of receiving notification of the borrower’s death. This formal notice informs the estate or heirs that the loan balance is now due.

Heirs are generally given a period of six months from the date of the Due and Payable notice to either repay the loan or sell the property. If additional time is needed, heirs can request extensions from the lender. Up to two 3-month extensions may be granted, potentially providing a total repayment period of up to 12 months, provided heirs demonstrate active efforts to sell or refinance the property.