Estate Planning & Probate Selling Advice
It’s estimated that millions of Americans will turn 65 between now and 2030. To help ease financial burdens in retirement, many homeowners in this demographic are turning to reverse mortgages. But how does a reverse mortgage work when the homeowner passes away?
Whether you’re planning ahead or helping family members understand their choices, we’ll break down what a spouse, partner, or heirs can expect when it’s time to settle the loan. We’ll also provide a few tips you can share with your heirs in advance.
What is a reverse mortgage?
A reverse mortgage is a type of loan that allows older homeowners to convert part of their home equity into cash without selling the property. It’s designed primarily for people aged 62 or older who want additional income during retirement. Instead of making monthly mortgage payments, the loan balance increases over time as interest accrues, and repayment typically occurs when the homeowner moves, sells the home, or passes away.
Homeowners can receive reverse mortgage funds in a lump sum, monthly payments, or as a line of credit. While this option can ease financial pressures in retirement, it’s important for you and your heirs to understand the terms and impact on your estate.
In the upcoming sections, we’ll address general after-death rules that apply to Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage loan in the country.
How does a reverse mortgage work when you die?
What happens to your reverse mortgage when you die will depend on several key factors, including:
- Whether you have a co-borrower on the loan agreement
- When you took out the loan (before or after a specific date)
- Whether you were married when you took out the loan (and stayed married until your death)
Here’s how it works depending on your co-borrower status or if your spouse or partner is not on the loan:
- If you have a co-borrower spouse or partner
If your spouse or partner is listed as a co-borrower, they can remain in the home without needing to pay off the loan right away. The loan continues under the original terms, allowing your co-borrower to stay until they move or pass away. The co-borrower must be able to meet the obligations of the original reverse mortgage loan agreement.
- If your spouse or partner is not a co-borrower
If your spouse or partner is not a co-borrower, they may still be able to stay in the home if they pay off the reverse mortgage loan. However, they may also be able to stay without paying off the loan, depending on when the loan was taken out and if they can qualify as an “eligible non-borrowing spouse” under specific regulations, which may be difficult.
For reverse mortgages taken out on or after a specified date:
If the borrower passes away or moves into a healthcare facility for over 12 months, the lender or servicer will determine whether the non-borrowing spouse qualifies to stay in the home under a deferral period. To remain in the home, the spouse must meet several criteria to be considered an eligible non-borrowing spouse, including:
- Marriage status: They must have been married to the borrower when the reverse mortgage was signed and stayed married until death. For couples who were unable to legally marry at the time of the loan, the spouse must prove they were legally married at the time of death.
- Non-borrowing spouse identification: The loan documents must identify the spouse as a non-borrowing spouse.
- Residency: They must have lived in the home when the loan was signed and continue to use it as their primary residence after the borrower’s passing or long-term healthcare facility stay.
- Loan compliance: They must continue meeting all loan requirements, such as property tax and insurance payments, to avoid the loan becoming due for other reasons.
For reverse mortgages taken out before a specified date:
If the borrower passes away or moves into a healthcare facility for over 12 months, the lender or servicer has two main options: proceed with foreclosure or enter the mortgage optional election (MOE) assignment process, which may allow a qualified non-borrowing spouse to stay in the home.
- Foreclosure: If the lender chooses foreclosure or finds that the non-borrowing spouse doesn’t qualify for MOE Assignment, they are required to start foreclosure within six months of the borrower’s passing. However, the spouse may request a delay of up to 180 days if they are actively working to sell the home or satisfy the debt.
- Mortgagee Optional Election (MOE) Assignment: In cases where the lender opts for MOE Assignment instead of foreclosure, the spouse must meet certain eligibility requirements to stay in the home.
- If you have heirs
If heirs want to keep the house after the borrower passes away, they will have to repay either the full loan balance or 95% of the home’s appraised value, whichever amount is less.
Reverse mortgage after death payoff options
When a reverse mortgage borrower passes away, the loan typically becomes due, and the borrower’s heirs are responsible for resolving the debt. Fortunately, heirs have several options to address the loan, depending on their goals and financial circumstances.
- Heirs can pay off the loan through a home sale: Selling the home is a common choice for heirs looking to satisfy a reverse mortgage. Once the home is sold, proceeds go toward repaying the loan balance. Heirs keep any remaining funds if the sale price exceeds the loan amount. However, if the home sells for less than the loan balance, heirs are not responsible for the remaining debt, as reverse mortgages are generally non-recourse loans.
- Heirs can satisfy the loan through a short sale: If the home’s market value is lower than the loan balance, heirs may consider a short sale, where the home is sold for less than what is owed on the loan. With lender approval, this option allows heirs to settle the reverse mortgage even if the sale proceeds do not cover the full balance due.
- Heirs can sign a deed-in-lieu of foreclosure: Another option for an underwater house is to sign a deed-in-lieu of foreclosure, where heirs transfer ownership of the home directly to the lender. In return, the lender forgives the loan balance, allowing heirs to avoid the foreclosure process.
- Heirs can take out a forward mortgage: If heirs wish to keep the home, they may consider taking out a forward mortgage to pay off the reverse mortgage balance. This option requires that heirs qualify for a new loan based on their income, credit history, and other financial criteria.
- Heirs can refinance into a new reverse mortgage: For eligible heirs who meet age and other qualifications, refinancing the reverse mortgage into a new reverse mortgage is another possibility. This option allows them to maintain ownership of the home without monthly payments.
It’s recommended that non-borrowing family members living in the home decide together in advance what they will do after the borrower’s passing.
What timelines can reverse mortgage heirs expect?
As noted above, a reverse mortgage loan becomes due after the borrower’s death. After receiving a due and payable notice from the reverse mortgage lender, heirs will typically have 30 days to buy, sell, or turn the property over to the lender to satisfy the remaining debt. However, lenders may extend the timeline up to six months.
Tips when selling a home with a reverse mortgage
Selling a home with a reverse mortgage follows a standard sale process, but there are a few key considerations:
- Communicate with the lender early: Heirs should notify the lender immediately after the borrower’s passing and confirm the reverse mortgage balance.
- Understand the appraisal: The home’s appraisal may impact the sale price, especially if it’s close to the loan balance.
- Consider a real estate agent with experience: Working with a qualified real estate agent who understands reverse mortgage sales can simplify the process.
- Prepare for closing costs: Heirs may be responsible for typical closing costs and should plan for these fees.
Navigating the sale of a home with a reverse mortgage can feel challenging, but a knowledgeable real estate agent can provide essential support. From understanding payoff amounts to handling the paperwork, a top agent can guide heirs through each step, ensuring a smooth and efficient process.
