Reverse Mortgage After Death - What Happens
By Liz Clinger Updated on 11/26/2014
If you are considering a reverse mortgage, you may have wondered what happens to your home and finances should you pass away before repaying the loan. Depending on whether or not you have heirs to take over the home will impact how the reverse mortgage will be repaid.
What happens with the reverse mortgage loan after death is established in the borrower’s will as with any other type of loan. Usually the property is inherited by the borrower’s heirs who then must decide whether to retain the home or to sell. If the heirs decide to keep the property, they must pay off the balance of the reverse mortgage either by refinancing, or all at once if the funds are available to them. If the heirs decide they want to sell the home, they must inform the reverse mortgage lender as quickly as possible and continue to communicate with them during the selling process.
Can I keep my family's home with a reverse mortgage after they have passed?
Yes, you can keep the home, however you may not keep the reverse mortgage intact, you must either pay the balance immediately, or the loan must be refinanced into a new mortgage.
What Happens if the Borrower of the Reverse Mortgage Does Not Leave a Will?
If a home owner passes and has a reverse mortgage, and does not leave a will, the estate will generally to the next of kin, for instance the home owners spouse or children.
What Happens in the event that the homeowner passes with no heirs?
If the reverse mortgage borrower passes away without heirs, the executer will probate the estate to repay the balance owed on the mortgage. If there is no executor either, the home will default back to the bank for re-sale to pay off the amount owed.
What if the home lost value and the reverse mortgage is upside down?
It is a requirement for homeowners who have a reverse mortgage to have insurance that blocks the heirs from having to repay more than the home is worth, if they sell the home to a non-family member. If they keep the home they will need pay the amount of the reverse mortgage or to refinance and pay the amount owed under the newly refinanced mortgage.
How Do I Sell a Home with a Reverse Mortgage?
Some believe that heirs have a 12 month period in which to make a decision about whether or not to sell. However, depending on the lender’s approval, in most cases heirs have periods of three months at a time, up to 12 months to complete the sale of the home. This is why consistent communication with the lender is so crucial, since the lender will need to see the selling efforts of the heirs. While lenders do not wish to foreclose and become responsible for the sale of the home, if they are not seeing sufficient effort by the heirs to sell they will eventually be forced to take on the facilitation of the sale in order that the reverse mortgage be paid off.
As with a traditional mortgage, after the sale of the property any remaining equity is retained by the heirs. Yet since reverse mortgages are non-recourse loans, in the event that in the current market the home does not sell for as much as the balance owed including any accrued interest, the heirs
then become responsible for any remaining balance.
Reverse mortgage borrower must buy mortgage insurance from the FHA or Federal Housing Administration. The FHA is a division of HUD, the Department of Housing and Urban Development. With the reverse mortgage program, HUD guarantees that a borrower or their heirs will never owe more on their loan than the home is worth in a true third party sale. This guarantee requires that it be a bona fide third party sale to a non-family member.
Heirs are not permitted to sell the home for less than is owed on the reverse mortgage to a family member with the expectation that the FHA insurance will cover the difference still owed to the lender. This is only the case when the balance of the reverse mortgage is more than the home’s value, as a protection for the lender from having to pay the balance while the home stays within the family. In other instances, sale of the home to a family member or relative would be permitted.
An Overview of Reverse Mortgages
Unlike a traditional mortgage, a reverse mortgage does not require you to make monthly payments on the loan or the interest and charges that accrue. The amount of funding you can get from your reverse mortgage is determined by the age of the youngest borrower (who must be a minimum of 62 years old), the equity you have in your home and other factors that the lender will consider. If you choose to get a reverse mortgage, you will still be responsible for keeping up with your taxes, home insurance, HOA fees and home maintenance. In order to qualify for a reverse mortgage, the home must also be your primary residence. Also unlike traditional mortgages, should you get a reverse mortgage, you will retain ownership of the home, not the bank.
Yet as with a traditional mortgage, reverse mortgage borrowers have the option to: change their minds and sell the home, or move, leaving the home to their heirs. The reverse mortgage will then need to be paid off, yet any remaining equity in the home is retained by the borrower or their heirs. The decision whether to remain residing in the home or not, is your choice, not the bank’s. There are typically no prepayment penalties with a reverse mortgage if that is your decision.
For seniors who do decide to remain in their home for many years, the reverse mortgage will accrue interest and other charges over the course of the loan. The amount of remaining equity in the home will then be determined by how much the borrower has received from the loan, the total accrued interest, and the market value of the property. For instance, if a reverse mortgage borrower received their funds in one lump sum, they would acquire interest much more quickly than those who receive their funds in the form of monthly or term payments (or as an equity line of credit from which they draw infrequently). Of course, the current real estate market and the change in home values since the reverse mortgage was initially obtained will determine the amount, if any, of appreciation in the home’s value.
Get a Quote
If you would like to secure a reverse mortgage, visit our Lender411 Get a Quote page to conveniently receive reverse mortgage interest rate quotes from nearby lenders in your area. Start comparing loan offers today and take the first step toward a smart mortgage. You can also view Reverse Mortgage qualifications and guidelines .