Keeping the home after paying off a reverse mortgage will require certain steps on different timelines. Knowing these processes could be essential for older homeowners attempting to pay off their houses, especially to plan for their family members after they’ve gone. To learn more, continue reading to find out what heirs need to know about their responsibilities and options, from paying off the debt to selling the home.
Table of Contents
What Is a Reverse Mortgage?
How Do You Pay Back a Reverse Mortgage?
How Does a Reverse Mortgage Work When You Die?
Are Heirs Responsible for Reverse Mortgage Debt?
What Is the Timeline for Repayment on Reverse Mortgages?
Reverse Mortgage After Death Bottom Line
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan available to homeowners aged 62 and older that allows them to convert part of the equity in their home into monthly income or cash. Unlike a traditional mortgage, where the borrower makes monthly payments to the lender, with a reverse mortgage, the lender makes payments to the borrower.
Reverse mortgages are endorsed by the Federal Housing Administration and come in two main types. The most common type is called Home Equity Conversion Mortgages or HECMs. Reverse mortgages often seem like opportunities for senior homeowners to continue living in their homes even after they retire. They provide them with cash to pay off their mortgages based on a loan payment system or a line of credit.
When Does a Reverse Mortgage Become Due?
A HECM reverse mortgage loan becomes due when the homeowner/borrower:
- Moves out of the house
- Is absent for at least 12 months due to illness
- Is negligent of their specific contract terms
- Passes away
- The title is transferred to someone else
- Fails to look after the property
- Fails to maintain property insurance
- Fails to pay taxes (typically for 6 months or more, depending on the specific terms outlined in the loan agreement)
At that point, the proceeds from the sale of the home are used to repay the loan, including any accrued interest and fees.
Who Pays the HCEM Loan When It’s Due?
The borrower or the heirs are responsible for repaying the HECM loan when it becomes due. At this point, the borrower, and if the borrower has passed away, the spouse (who is not a borrower), will have a few options to pay off the loan.
How Do You Pay Back a Reverse Mortgage?
To pay off the HCEM loan, the borrower or their heirs can:
Sell the Home: The borrower can sell the home and use the proceeds to repay the loan. Any remaining equity after repayment belongs to the borrower or their estate.
Repay the Loan: The borrower or their heirs can repay the loan balance in full to retain ownership of the home.
Deed the Property to the Lender: If the loan balance exceeds the home's value, the borrower or their heirs can choose to deed the property to the lender to satisfy the debt. This option allows them to avoid owing additional money.
Refinance: In some cases, the borrower or their heirs may refinance the HECM into a traditional mortgage or another financial arrangement to continue owning the home.
How Does a Reverse Mortgage Work When You Die?
When a borrower with a reverse mortgage passes away, their heirs are required to repay the loan. Several options are available in this situation.
The most common approach is to sell the house and use the proceeds to settle the reverse mortgage with the lender. Any remaining equity from the sale belongs to the heirs.
If the home sells for less than the outstanding balance of the Home Equity Conversion Mortgage (HECM), the heirs are protected. As long as the sale price is at least 95% of the appraised value, the heirs are not liable for the shortfall. The Federal Housing Administration ensures this protection, marking the loan as closed once the house is sold.
How Do Jumbo Reverse Mortgage Loan Payments Work After You Die?
Jumbo reverse mortgages are tailored for homes with higher values, typically those valued at $1 million or more. Unlike standard Home Equity Conversion Mortgages (HECMs), which are insured by the Federal Housing Administration (FHA), jumbo reverse mortgages are not federally insured. Families of the borrowers of these mortgages need to check with lenders to review the contracts for the fine print on repayment. With reverse mortgage loans, the remaining balance may still be owed.
Can You Still Keep the House in the Family if the Homeowner Dies?
Yes, you can still keep the house in the family if a child or family member can take out a new mortgage after the original homeowner dies. The family member can buy the home from the lender for 95% of its current appraised value. This allows them to settle the HECM loan and retain ownership of the property. All of this has to be done within six months, however. Even as that’s going on, the reverse mortgage balance gets bigger. This means that heirs to an estate need to act quickly if they plan on keeping the house in the family.
Are Heirs Responsible for Reverse Mortgage Debt?
Yes, heirs are responsible for paying off the reverse mortgage loan if all borrowers pass away. Sometimes, spouses go in on a reverse mortgage loan together. In this case, the death of one homeowner does not bring the lenders down on your head. The loan doesn’t need to be repaid until both homeowners move out of the house or die. This also applies if one spouse has to live in a care facility. So long as one of the homeowners still uses the property as their primary care facility, the loan doesn’t have to be repaid.
Due to this, its recommended by the Consumer Financial Protection Bureau to co-borrow on reverse mortgages between two spouses. If you don’t, your spouse or heir may have to pay the loan back immediately when you die. Non-borrowing spouses will have to pay back reverse mortgages within 6 months if the borrower dies.
What Is the Timeline for Repayment on Reverse Mortgages?
Repayment on reverse mortgages begins when the borrowers die, move out, or are both in long-term care for at least a year. At that time, the lender sends the homeowners a due and payable notice for the loan amount, which the borrowers need to respond to within 30 days.
At that time, the borrowers have 6 months to pay off the reverse mortgage. Borrowers can also request two 90-day additional extensions to pay off the loan if they need it.
Reverse Mortgage After Death Bottom Line
Reverse mortgages can be an opportunity for senior homeowners to continue living on their retirement while taking new loans out on their mortgage. However, these loans have to be paid back eventually, so borrowers need to know how these loans work after they’ve died.
Often, the house will be sold, and the proceeds will go towards the loans. Surviving family members will have 30 days to respond to the lender’s initial request, followed by a payment period of 6 months, or a maximum of 12 months by request. The Consumer Financial Protection Bureau prevents lenders from coming after estates after the house in question has been sold, even if it didn’t cover the loan.
Those who are getting old and have reverse mortgages and those who are part of the estate of someone who does can both benefit from the information presented here. Creating a timeline of action and repayment is essential when reverse mortgages become due.