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

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 borrower 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.

Reverse Mortgages Aren’t Much Different from Traditional Loans 

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 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. (Receive a free calculation here.)

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 is 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 to a Reverse Mortgage 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. During this time, the lender or the lender’s servicer will want to see the efforts of the family to sell and this is where the communication is important.

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 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 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 keep the property within the family.

Maintain Communication with Servicer 

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 if they live in their homes.

Loan Maturity FAQs

What happens if a person dies with a reverse mortgage?

When someone passes that has a reverse mortgage, the loan becomes due and payable.  The heirs or the estate need to decide if they want to keep the home, sell it or walk away and let the lender take the home to repay the debt.  In any case, the heirs or the estate will not need to pay anything they do not wish to pay if they do not want to keep the home so the choice is entirely up to the heirs or the individual making the decisions for the estate. The best action is to decide what the goals of the heirs or estate are.  If the goal is to retain the home, the heirs will have the option to repay the loan at the amount owed or 95% of the current value of the home, whichever is less.  Heirs should probably contact a senior real estate specialist in the area before they decide to walk away from any property to determine what the most probable selling price of the home is in its current condition.  If there is still equity in the home, heirs should take the steps to transfer title so that they can sell the home and retain the equity.  If there is no equity, they can remove all personal property from the home and contact the lender to let them know they do not wish to keep the home and either work with the lender to transfer the property to the lender with a Deed in Lieu of Foreclosure or let the lender take the property in a foreclosure action.  Either way, the action has no bearing on the heirs, does not affect their credit and the lender cannot look to the heirs for any repayments.

Are heirs responsible for reverse mortgage debt?

Heirs are never responsible to repay the debt on a reverse mortgage.  The loan is a non-recourse debt which means that the property is the only security the lender and HUD have for the loan.  If the heirs wish to keep the home, they would need to repay the loan or 95% of the current value of the property, whichever is less but that would be their choice.  They are never obligated to pay for anything on the reverse mortgage if they do not want to and it has no effect on their credit either way.

How long can you live in a reverse mortgage after death?

This really depends on your right to the property after the passing of the owner.  If you are the heir and are working to keep the home, you may have a longer period to remain in the home.  If you are a renter, there may be other circumstances that come into play that would affect the amount of time you can remain in the home. If you do internet searches, there are stories of heirs and others who live in homes for years after the borrowers pass who had reverse mortgages.  However, you cannot count on this timeframe.  When that happens, it is because something is not functioning correctly with the process or the servicer.  The lender usually finds out about the death of the borrower within just a few months of the passing of the borrower.  They will usually contact the heirs shortly after that event to determine what their plans are for the disposition of the loan.  If the heirs state that they want to sell or repay the loan and keep the property, the lender has certain steps they must take to determine the final payoff which includes an appraisal.  If there is no contact or heirs are not specific, often the lender will proceed as though the loan will be repaid with a foreclosure action (where the lender must foreclose on the loan and then sell the property to repay the debt). A foreclosure action itself takes anywhere from 5 – 6 months to complete from the time that the initial intent to foreclose is recorded at the county in which the property is located depending on the state and the foreclosure laws.  Some states take longer and require the courts to be involved.  Therefore, about the shortest time that an occupant can live in a home after a reverse mortgage borrower has passed is about 6 months but that is based on the lender’s quickest timeframe to get the home if they begin immediately.  If there are other heirs involved, they may move to evict much sooner once they are the owners of the home.

How long do heirs have to pay off a reverse mortgage?

If you are selling the home, the lender will work with you and give you extensions, usually in 3 month increments out to 12 months if they can see that the home is being actively marketed and the time is necessary in your area.  If homes are selling and closing in 60 days, such a timeframe would not be warranted and you may receive some pushback on a request for extensions.  However, if there was a probate or other title requirements necessary to sell the property and you keep the lender informed and are diligent on the process to sell, they will work with you. The same is true if you are refinancing the loan with another lender.  If you need some time to have the title changed so you can close a new loan and you keep the lender informed of the process, they will work with you to allow you the time you need as long as everything is reasonable.  Communication is key and the lender and HUD do not want to take the home, they want the loan repaid do as long as you are showing them a good faith effort and progress is real, they want you to succeed.

What is the Reverse mortgage foreclosure timeline?

The timeline for a foreclosure of a reverse mortgage is the same as any other loan once the decision has been made to foreclose.  It depends on where the property is located and the laws in effect in that part of the country, whether the area is a Deed of Trust state or a Mortgage state and if foreclosures require a judicial foreclosure or can be conducted with a Trustee’s Sale.  But the process is that the lender sends you a notice that there is a breach in the loan terms and as such, the loan is in default and that if that default is not cured within 30 days, the lender intends to file a foreclosure.  That breach can be failure to pay your property taxes, failure to occupy the home as your primary residence or the death of the borrowers.  Some breaches can be cured, some cannot and when the breach cannot be cured (such as the passing of the borrowers), the lender would continue with the foreclosure process to repay the obligation that is now due and payable. If the property is located in a Deed of Trust State, the lender then records a Notice of Intent to Foreclose that they also must give to the borrower.  This gives the borrower notice that they intend to sell the property at auction at a specific date in the future if the default is not cured.  This is usually deemed the right of redemption period if the default is one that can be cured.  At the end of this period, the foreclosure goes into an advertising period during which the borrower can still repay the loan in full, but no longer can redeem the loan and keep the loan active by curing a curable default.  At the end of the advertising period, the property is sold at a foreclosure auction by the trustee for a Deed of Trust sale.  For properties located in Mortgage states, the dates and timelines are affected by the court dates and heirs would need to pay attention to the court summons and be certain to respond to any complaints in the applicable time periods if they wish to object to the foreclosure or the judge could authorize the sale of the home with a summary judgement.  Some states also have rights of redemption periods so you need to verify with an attorney in your state if you are concerned with your specific circumstances.

Can heirs walk away from reverse mortgage?

Heirs can always walk away from a home with a reverse mortgage an owe nothing to the lender.  There is no concern with your credit, you never signed any agreement to pay anything and therefore you have no liability and no credit concerns.  The one thing you may want to consider is possible liability if you cancel all insurance, etc. and the estate still has considerable assets.  We recommend that you always check with your estate attorney.  The lender will order “forced placed coverage” on a property that would protect the dwelling in the event of fire but would not cover contents or liability.  Since the property is still in the borrower’s or their estate’s name, we do not know nor would we give any advice as to the effect of any liability should someone get onto the property and become injured.  We always recommend that you talk with your estate attorney to determine any concerns before you cancel insurance policies or let the property become run down, dilapidated, etc. We also recommend that you talk with a senior real estate specialist before making the decision to walk away.  Many times, these specialists also work with estate sale professionals and we have seen many examples where family members living out of state thought they had to let the home go and the personal effects of the homeowner go because they were not in the area.  They were able to connect with a senior real estate specialist who showed them that the home still had some equity and that they could arrange an estate sale of the personal possessions that the family either did not want or could not take.  The estate sale folks sold the personal property or donated anything left at the end of the sale that netted additional money for end-of-life expenses and cleaned the entire house out as it part of their agreement and donated the remaining unsold items (the family gets the receipts for tax purposes).  The properties sold and netted the heirs some money and the heirs were able to handle the entire process from a distance in most cases (not a lot in all cases but some was better than walking away with nothing).  Heirs can walk owing nothing if the equity is not there but it doesn’t hurt to make a few phone calls first.

Summary:

  • 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: