What Happens With a Reverse Mortgage When You Die?

A reverse mortgage allows homeowners, typically those aged 62 and older, to convert a portion of their home equity into cash without needing to make monthly mortgage payments. This financial product uses the home as security, and the loan balance grows over time as interest and fees are added. Unlike traditional mortgages, repayment of a reverse mortgage becomes due when the last borrower permanently leaves the home, sells it, or passes away. Understanding the implications after the borrower’s death is important for their estate and heirs.

Initial Steps After the Borrower’s Passing

Upon the passing of the last surviving borrower, the reverse mortgage lender must be notified promptly. This notification is typically the responsibility of the deceased’s executor, a family member, or an attorney representing the estate. It is advisable to communicate with the lender within 30 days of the borrower’s death.

Lenders will then request specific documentation to verify the death and establish who is authorized to act on behalf of the estate. Common documents include a certified copy of the death certificate and proof of heirship or executorship, such as court appointments, letters testamentary, letters of administration, or relevant trust agreements.

Once the lender receives notification and the necessary documentation, they will issue a “due and payable” notice. This notice informs the estate and heirs that the loan balance is due. It also outlines options for resolving the debt and initial deadlines.

The Loan Becomes Due

The death of the last surviving borrower triggers a “maturity event,” meaning the entire reverse mortgage loan balance becomes immediately due and payable. This balance includes the principal amount advanced, accrued interest, and any associated fees. It is not an ongoing loan that transfers to heirs in the same manner as a traditional mortgage.

Most reverse mortgages, particularly Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration (FHA), are non-recourse. This means that the debt is secured solely by the home itself, and heirs are not personally liable for the loan if the balance exceeds the home’s value. FHA mortgage insurance protects against owing more than the property’s value.

Heirs have the option to satisfy the loan by paying the lesser of the outstanding loan balance or 95% of the home’s appraised value. This provision allows heirs to retain the property even if the loan balance has grown to exceed its current market value. To determine the home’s market value, the lender orders an independent appraisal, a step in calculating the payoff amount under the 95% rule.

Choices for the Estate or Heirs

Once the reverse mortgage becomes due, the estate or heirs have several choices for addressing the outstanding loan. One option is to repay the loan to retain ownership of the home. This can be accomplished using personal funds, proceeds from other assets, or by securing new financing, such as a traditional mortgage, to pay off the reverse mortgage balance.

If the heirs wish to keep the home, they must pay the lesser of the full loan balance or 95% of the home’s appraised value. This payment must be completed within six months from the date the loan becomes due. However, lenders may grant up to two 90-day extensions, potentially extending the repayment period to a full year, provided there is consistent communication and documentation of repayment efforts.

Another option is to sell the home to satisfy the reverse mortgage debt. In this scenario, the property is listed and sold, with the proceeds used to pay off the loan. Any funds remaining after the loan is satisfied are disbursed to the estate or the heirs. This process also operates within the six-month timeframe, with potential extensions available to complete the sale.

A third option is to allow the lender to take possession of the property. This can occur through a deed in lieu of foreclosure, where the estate voluntarily transfers ownership to the lender, or by simply taking no action, which will lead to the lender initiating foreclosure proceedings. This choice is often made when heirs do not wish to keep the home or manage the sale.

Lender Actions if the Loan is Not Satisfied

If the estate or heirs do not repay the loan or sell the home within the agreed-upon timeframes, including any granted extensions, the reverse mortgage lender will begin the foreclosure process. Foreclosure is the legal procedure by which the lender takes ownership of the property to recover the outstanding loan balance. This action allows the lender to sell the home and recoup their funds.

Despite foreclosure, the non-recourse nature of most reverse mortgages protects heirs. This means that if the home sells for less than the amount owed on the loan during foreclosure, the heirs are not personally responsible for the shortfall. The loss is covered by FHA mortgage insurance, if applicable.

The foreclosure process follows legal steps, varying by jurisdiction. Because heirs are not personally liable for the debt, foreclosure of a deceased borrower’s reverse mortgage does not impact their credit scores. Their financial standing remains unaffected by the property’s disposition.