It seems that one of the most popular questions we get is what happens with my reverse mortgage and my home after death. After all, 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. 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?
Borrowers may or may not know that the benefit amount is based on the age of the youngest borrower. Those who have done their research and know this fact want to know what will happen if the younger borrower dies or must permanently leave the home first. And all borrowers with heirs are always rightly concerned about what happens to their homes and the mortgage upon their passing.
How Reverse Mortgages Work
Firstly, to clarify one point, there are never any 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). However, the borrowers are still responsible for payment of taxes and insurance and for the upkeep on their homes.
Borrowers who get into this loan thinking that they will no longer have any expenses on that home are incorrect and if they cannot afford the taxes, insurance, (Homeowner’s Association Dues if they live in a condominium) and other expenses to maintain that property are in for a rude awakening and should be looking at other options.
So to be sure that you can live in the property for the rest of your life with your reverse mortgage, your income or the income that you will receive from that reverse mortgage must be at least high enough to pay these expenses while allowing the borrower to live in comfort.
What Happens After Death?
Now that we have determined that a reverse mortgage is right for you, what happens to the mortgage after death? This is one of the areas in where it is like a forward or traditional mortgage in some ways, but slightly different in others. Reverse mortgage borrowers own their homes, not the bank. Many believe that the home reverts to the bank upon the death of the last borrower, but that is not the case.
Just as with a forward mortgage, homeowners can sell their properties and move if they change their minds later and decide that this won’t be the last residence of their life and they can leave their homes to their heirs. Just as with a forward mortgage, the reverse mortgage must be paid off, but all remaining equity stays with the heirs. The bank does not make the decision as to when you stay or leave you home and there is no prepayment penalty.
How Interest Accumulates
Borrowers who do stay in their homes for many years do accrue interest and charges on a reverse mortgage and the amount of remaining equity will depend on how much money the borrowers have taken from their mortgage, the interest that accrues and the values of properties.
For example, borrowers who obtain a reverse mortgage under the payment option or the line of credit option and 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. And then current real estate values and what values have done since the mortgage was first obtained will dictate whether there has been any appreciation in property values.
I have seen some articles wrongly blaming a reverse mortgage for depleting equity in specific properties and upon further research, the borrowers obtained more cash on their loan than the property was worth when they tried to later sell that property due to the massive drops in real estate values in general.
Selling the Home After Death
After the death of a spouse or borrower, if the real estate market is extremely depressed, if that borrower received more cash on their reverse mortgage loan than the property is currently worth then there will be no equity in the home…but that would be true of any mortgage product including traditional or forward mortgages.
The reverse mortgage does not dictate the real estate market and with the current real estate conditions, thousands and thousands of borrowers find that they now owe more on their current mortgages, both forward and reverse, than their properties are worth. This is where the insurance reverse mortgage borrowers receive really comes in handy, but I will talk about that later.
Borrowers determine the disposition of the property upon their death with their wills just as any other borrowers do, whether they have a forward mortgage or no mortgage. The property is passed to the borrowers’ heirs and then the borrowers’ heirs must do the same thing they would have to do with a forward mortgage – determine if they want to keep the home or sell the home.
If they want to keep the home, then they must pay off the balance with a new loan (refinance) or with other money available to them. If they choose to sell the home, then the heirs need to contact the servicer of the reverse mortgage as soon as possible and inform them of their decision and maintain communication with that servicer.
How Long to Repay the Loan
Some feel that the heirs have an automatic 12 months to decide what to do with the property and that is not the case. Upon the death of the last remaining borrower, the heirs have periods typically of three months at a time up to 12 months with the lender’s approval to sell the property.
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.
Reverse Mortgages are Non-Recourse Loan
Upon the sale of the property, all remaining equity belongs to the heirs, just as with a forward mortgage. 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.
As previously mentioned, 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 and the borrowers’ heirs will never owe more than the property is worth on a bona fide sale to a third party.
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).
This should dispel a few myths about what happens upon the death of reverse mortgage borrowers…
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.
Reverse mortgages become due and payable upon the death of the last remaining borrower or when the last borrower permanently leaves the home. But, borrowers must also 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.
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”