Who Is Responsible for a Reverse Mortgage After Death?
Understand what happens to a reverse mortgage after the borrower passes away. Learn about responsibilities and options for heirs and the estate.
A reverse mortgage allows homeowners, typically aged 62 or older, to convert a portion of their home equity into cash without needing to make monthly mortgage payments. Unlike traditional mortgages, where the borrower makes payments, in a reverse mortgage, the lender makes payments to the borrower, or funds are drawn as needed. The loan becomes due and payable when a specific event occurs, such as the borrower’s death or when the home is no longer the primary residence.
Loan Maturity Upon Death
A reverse mortgage becomes due when the last surviving borrower passes away or permanently moves out. The loan balance, including principal advances, accrued interest, and fees, must then be repaid. This balance grows over time as interest and mortgage insurance premiums are added monthly, potentially exceeding the home’s market value.
Reverse mortgages, especially Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration (FHA), are non-recourse loans. This means heirs are not personally responsible if the loan balance exceeds the home’s value or sale price. The home serves as the sole collateral, and FHA mortgage insurance covers any shortfall, protecting heirs from personal liability.
Non-Borrowing Spouse Protections
Eligible non-borrowing spouses under FHA-insured HECMs have protections allowing them to remain in the home after the borrowing spouse’s death. To qualify, the non-borrowing spouse must have been married to the borrower at loan origination, remained married until death, and occupied the home as their principal residence since closing. They must also be specifically named in the loan documents.
The loan must not be in default for reasons like unpaid property taxes, homeowner’s insurance, or property maintenance. While the non-borrowing spouse can continue living in the home, they do not access loan proceeds, and the outstanding balance continues to grow with accrued interest and fees.
Options for Heirs and the Estate
When a reverse mortgage becomes due, heirs or the estate have several options. One is to pay off the loan balance to retain ownership. This can be done using personal funds, a new traditional mortgage, or other estate assets. If the loan balance exceeds the home’s market value, heirs may pay 95% of the appraised value, whichever is less.
Another option is to sell the home, using the proceeds to satisfy the debt. If the sale price exceeds the loan balance, remaining equity goes to the estate or heirs. If the home sells for less than the loan balance, the non-recourse feature protects heirs from obligation, provided the sale is for at least 95% of the appraised value.
A third option, if heirs do not wish to keep or sell the home, is to deed the property to the lender. This “deed in lieu of foreclosure” transfers ownership to the lender, satisfying the debt without further obligation. This is often used when the loan balance significantly outweighs the home’s value, allowing heirs to avoid financial repercussions.
Steps for the Estate Administrator or Heirs
Upon the death of the last surviving borrower, the estate administrator or heirs should promptly notify the reverse mortgage lender. This notification typically involves providing a death certificate and any other requested documentation to verify the borrower’s passing. Maintaining open communication with the lender throughout this process is important for understanding specific requirements and timelines.
Lenders usually provide an initial period, often around 30 days from receiving notice, for heirs to determine their intentions regarding the property. Following this, heirs are generally given approximately six months to either pay off the loan or sell the home. Extensions may be available, often in 90-day increments, potentially extending the total period to 12 months, especially if the heirs are actively working to sell the property.
During this period, the lender will typically arrange for an appraisal to determine the home’s current market value. This valuation is important because it informs the payoff amount if heirs choose to keep the home, particularly if the 95% appraised value rule applies.