What Happens to a Reverse Mortgage When You Pass?
By: Courtney Jorstad
December 12, 2022 • 4 minute read
What Happens to a Reverse Mortgage When You Pass?
A reverse mortgage is an innovative financial tool that can be used to access the equity in your home.
It is a loan similar to a traditional mortgage, but instead of paying it back in monthly payments, it gets paid back when the last borrower leaves the home because they decide to sell, or the last borrower becomes deceased.
Because it is common for homeowners to have a reverse mortgage until they pass, one common question is: what happens to the reverse mortgage when that day comes?
The outcome will depend on whether there is a surviving spouse or not.
Keep reading to learn about what to expect depending on each possible situation.
What if the Surviving Spouse Wants to Continue to Live in the Home?
If the surviving spouse is a co-borrower on the reverse mortgage, he or she may continue living in the home and receiving the benefits from the mortgage as is.
If the surviving spouse is not a borrower on the loan, he or she may be able to continue living in the home, but this is only the case under certain circumstances.
The U.S. Department of Housing and Urban Development (HUD) issued a rule in 2014 stating that for loans issued on or after August 4, 2014, the non-borrowing spouse can stay in the home and defer paying the loan until he or she passes away or moves out permanently under the following conditions:
- The non-borrowing spouse is named in the loan documents as the non-borrowing spouse.
- The reverse mortgage is not in default (meaning that the loan is due and payable) for any other reason than the death of the spouse or the spouse living in a healthcare facility for more than 12 consecutive months.
- The borrower and the spouse were one of the following: legally married when the HECM reverse mortgage closed and stayed married until the borrower’s death. Or they were in a marriage-like relationship but were prohibited from marriage due to the gender of the borrower and non-borrowing spouse, and the spouses legally married and remained married before the passing away of the borrowing spouse.
- The non-borrowing spouse lived in the home at the closing of the reverse mortgage, and the home is his or her primary residence.
In order to remain in the home, the non-borrowing spouse must continue to maintain the home, pay property taxes, and insurance.
A non-borrowing spouse may reach out to a HUD counselor to learn more about the rights of non-borrowing spouses.
What Happens to a Reverse Mortgage When the Last Borrower Passes?
In the case of the last borrower dying, there will be some important decisions that will need to be made by the homeowner’s family members and/or heirs.
After the lender is notified of the death of the borrower, the first thing the lender will do is send notice that the reverse mortgage loan is due and payable. The notice will be sent to the estate within 30 days of being notified of the death.
After receiving the notice, heirs will typically have 30 days to decide what they want to do.
They have the following options:
- Sell the home. The heirs may sell the home to repay the loan. If the home sells for more than the balance, they may keep the proceeds.
- Keep the home. If the heirs decide to keep the home, they will need to pay the loan balance or 95% of the appraised value, whichever is less. This may be done by taking out a traditional mortgage or with cash.
- Sign the title over to the lender. The heirs may satisfy the loan by signing the title over to the lender along with a deed in lieu of foreclosure. This will prevent the property from foreclosing.
- Do nothing. If nothing is done, the lender will foreclose on the home.
How Long Do Heirs Have to Settle a Reverse Mortgage?
If the heirs decide to sell or keep the home, lenders will typically give them six months to do so.
It may be possible to obtain an extension if the home hasn’t sold or finances have not been obtained, but the heirs can show that they are actively working toward doing one or the other.
It’s important to note that the lender will continue to charge interest and fees until the loan is paid.
How to Prepare Your Heirs
If you are applying for a reverse mortgage, it is recommended that you involve your family members in the process. Family members may even attend the counseling session required to apply for a HECM loan.
If you obtained a reverse mortgage and your family members were not involved in the process, it is recommended that you inform them of your decision and help them understand the expectations for settling the loan if you still live in the home when you pass.
If you have more questions about a reverse mortgage, click here to learn more.
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