It seems that one of the most popular questions we get is what happens with my reverse mortgage and my home after death. The reverse mortgage is intended to be the last loan that borrowers will ever need, so this is a question many homeowners and their heirs have on their minds as many of them intend to keep the loan and the home for life.
If they do get a reverse mortgage and it does enable them to live in their homes without paying a mortgage payment for the rest of their lives, what happens after death?
Most borrowers know that the benefit amount or eligible Principal Limit is based on the age of the youngest borrower (in addition to the value of the home, HUD lending limits and interest rates in effect at the time). Those who have done their research and know this fact, are concerned about any changes to their loan when one borrower, older or younger, passes first. They want to know can the remaining spouse remain in the home, will there be any changes to the loan as a result, how does this affect the heirs, etc.
And in fact, all borrowers with heirs are always rightly concerned about what happens to their homes and the mortgage upon their passing. The first thing to ease everyone’s concern is that once the loan closes, the terms do not change. If there are more than one borrowers on the loan and one predeceases the other(s) or must leave the home, regardless of the ages of the remaining borrower(s), the terms are not changed.
So How Reverse Mortgages Work?
Exactly as the name implies – in reverse of a traditional or “forward” mortgage. There are no monthly payments of principal or interest due on a reverse mortgage. The loan accrues interest and other charges that are not due and payable until the last borrower permanently leaves the home (12 months or more).
So instead of you paying a monthly payment to reduce the amount you owe on the loan, you receive funds from the loan (monthly, as a line of credit, in bulk sums, or a combination of some or all of these options) and your balance owed grows over time as you accrue interest and borrow money.
And while there is never a payment due on a reverse mortgage, there is also no prepayment penalty so borrowers can choose to make a payment in any amount at any time without penalty but are not required to do so until the home is sold or they permanently move out of the property.
However, the borrowers are still responsible for payment of taxes and insurance and for the upkeep on their homes. This is the same requirement as on a forward mortgage and not paying these assessments is a default under the terms of the loan so this is an important thing to remember.
How Interest Accrues
Interest accrues on the money you actually borrow. Reverse mortgage borrowers are approved for a maximum loan amount or Principal Limit but how you take the money and how quickly you accrue interest under the program is entirely up to you. The more money you borrow and the earlier in the loan you borrow it, the more interest will accrue on the loan.
Borrowers looking to leave the most inheritance to heirs should be looking to borrow as little as possible and spread that borrowing out over time rather than take a large lump sum draw at the beginning of the loan.
For example, borrowers who obtain a reverse mortgage under the payment option or the line of credit option but then do not draw large sums of money immediately or only draw a little now and then, will not accrue interest as fast as those who take a lump sum draw on the entire amount. This ensures that the least amount of interest will accrue and the balance will be the lowest possible at the time the loan is repaid.
Borrowers just looking to pay off an existing loan so that they can remain in their home, who have no heirs or no heirs to whom they are mindful of leaving their home may want to be able to use the proceeds now to enrich their lives. Either way, it’s your home, your equity and your choice.
Everyone must also keep in mind that property values will be a big determinant in the equity left as well. If property values continue to rise it certainly helps ensure that there is equity to leave to heirs. However, if values decline, just as if you had a forward loan, there would be less equity available to family members should you pass and had used all your loan proceeds.
But that is the intent of the loan – so that you can use your equity as you see fit. If you do not need the funds to live, then you can save the equity for future generations but if you do, then the loan will help you remain comfortably in your home without having to make a payment
What Happens After Death?
After the passing of the last surviving borrower, the reverse mortgage loan balance becomes due and payable. Many believe that the home reverts to the bank upon the death of the last borrower, but that is not the case.
Your heirs will have the option to decide whether they want to repay the loan balance and keep the home, sell the home and keep the equity or simply walk away and let the lender dispose of the property.
If they choose to keep the home, they will need to repay the loan and that means either refinancing the loan with new financing or with other money available to them.
They can pay off the loan at the lower of the amount owed or 95% of the current market value. If they wish to sell the home, they need to make sure that they take whatever steps are required (probate, trust certification, etc.) to change the title so that they can sell the home and we encourage borrowers to contact an estate attorney to be sure they are taking the property steps for their circumstances.
The lender will work with heirs and if they are refinancing into a loan of their own they will typically give them up to 6 months to close that loan, or up to 12 months (6 months with two 3-month extensions) if they are selling the home. Every 3 month extension may require evidence the home is listed for sale on the MLS.
The lender has no desire to have to foreclose and sell a property on their own, but if the family is not making any attempts to sell the property and repay the loan, the lender must eventually step in to facilitate the repayment of the loan.
Just as with a forward mortgage, when the loan is paid off all remaining equity stays with the heirs.
If there is a shortfall in the amount owed and the current market value of the home, the heirs will own nothing and the lender cannot look to any other assets to repay that money. FHA will cover any losses as all reverse mortgages are non-recourse loans.
If your heirs find themselves inheriting an upside down home, they are not obligated for any shortfall on the loan and we suggest you contact the lender regarding a Deed in Lieu of Foreclosure wherein the lender accepts a Deed instead of going through the Foreclosure process.
They can’t always do it, but when they can, it is quicker and if your heir has decided they do not want to be involved in selling the home or that there is no benefit to it, it may be easier for them.
Remember, the reverse mortgage is just a loan. You decide who will be your heir and who the home goes to after you pass. The best time to resolve this is before you’re gone and you can still direct your affairs.
We recommend that you consult with an estate attorney in advance to not only make sure your wishes are known, but to keep families from fighting and to preserve time when it may be needed for other affairs instead of trying to determine who will actually be doing what.
Reverse Mortgages are Non-Recourse Loans
Upon the sale of the property, all remaining equity belongs to the heirs, just as with a forward mortgage.
As we stated previously, a reverse mortgage is a non-recourse loan. Which means that, if with the combination of the accrued interest and current market conditions the property will not sell for enough to repay all amounts owed on the loan, then the borrowers’ heirs are not liable for any additional amounts owed.
Borrowers pay for mortgage insurance to the Federal Housing Administration (FHA), a division of The Department of Housing and Urban Development (HUD) which guarantees that the borrower will always have access to the reverse mortgage proceeds and also that the borrowers’ heirs will never owe more than the property is worth on a bona fide sale to a third party or a Deed back to the Lender.
The program does require a bona fide sale to a non-related third party, heirs cannot “sell” the home to other family members for less than is owed on the reverse mortgage expecting the FHA insurance to cover any shortfall to the lender on the amount owed.
There are no restrictions on sales to family members or otherwise, just in the case of a balance of the reverse mortgage being higher than the value of the property and heirs wanting the lender to forgive the over value portion of the loan and still keep the property within the family.
Dispelling Myths About Reverse Mortgages
Heirs need to maintain communication as they do not have a set 12 months to dispose of the property after the death of the last remaining borrower…even though the lenders are only too willing to work with families who have a viable marketing plan for the property. Lenders will have an appraisal completed by an FHA approved appraiser to determine if the heirs expectations are reasonable.
Reverse mortgage lenders do not want your home. Lenders are most happy when the loan is repaid and they do not have to become involved in foreclosure proceedings but the nature of the loan is the last loan you will ever need and since most reverse mortgages do terminate with the death of the borrowers, foreclosure at termination is often the result when family members do not want to be involved in or have to wherewithal to repay the loan or sell the house.
Reverse mortgages become due and payable upon the death of the last remaining borrower or when the last borrower permanently leaves the home. Heirs and others are not entitled to continue to live in the home after the borrowers are gone under the terms of the loan.
Reverse mortgages are not multi-generational loans. If family members live with borrowers with reverse mortgages the day will come when that loan must be repaid and those family members must plan for that eventuality well in advance.
Borrowers must pay their taxes and insurance and maintain the property to stay within the reverse mortgage contract – it is the monthly mortgage payments of principal and/or interest that reverse mortgage borrowers will no longer have to pay as long as they live in their homes.
The bank does not own your home, the borrowers and their heirs (upon their passing) do. Upon the death of the last remaining reverse mortgage borrower, the family has the right to keep the property or sell it and if the home is not worth enough to pay off the entire mortgage, the heirs are not liable for any shortfall on a bona fide sale to a third party due to the non-recourse nature of the loan. Understanding the nature of the loan and the options available, then communicating with your heirs can make the entire process so much easier for your entire family.
If you are an heir to a home with a reverse mortgage that’s now due, we recommend you taking these immediate steps.
Additional Resources for Heirs:
- Download this .pdf to learn more about how servicing companies typically handle the death of a last surviving homeowner
- Ask a related question in our “Ask the Experts” area: Death & Loan Maturity
- If you found this article helpful you may also be interested in “Understanding Your Reverse Mortgage Statement”