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.
Paying back a reverse mortgage can be confusing since they don’t work like a traditional loan. As an older homeowner, you need to plan for how your family or estate will be able to deal with the loan on your reverse mortgage in the event that you die. The process for doing this will change depending on whether you want them to simply pay off the loan or hope that the home will stay in your family after you’ve gone.
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.
What Is a Reverse Mortgage?
Conventional mortgages are lump-sum loans that are paid back in monthly installments. Reverse mortgages reverse this process by offering the loan itself in installments paid to the homeowner as a series of sums or a line of credit.
How Do You Pay Back a Reverse Mortgage?
When the homeowner moves out of the house, is absent for at least 12 months due to illness, is negligent of their specific contract, or dies, this loan needs to be paid off.
Reverse mortgages are endorsed by the Federal Housing Administration and come in two main types. The most common are called Home Equity Conversion Mortgages or HECMs. The second type is a jumbo reverse mortgage, which is more common for homeowners whose homes are valued at $1 million or more. This article applies to both, but the majority of cases will be HECMs.
How Does a Reverse Mortgage Work When You Die?
If the borrower dies and leaves their heirs with the responsibility of paying back the reverse mortgage, there are a few ways the estate can go about it. The first way to pay off the remaining reverse mortgage balance is to sell the house and pay off the lenders. The heirs of the estate keep the remaining balance.
You may be wondering what will happen if the house sells for less than the value of the HECM. You should know that once the home sells for at least 95% of the appraised value, homeowners don’t have to pay off the rest of the loan, and lenders can’t come after them. The Federal Housing Administration has the back of borrowers and their families in these cases: once the house is sold, the loan is considered closed.
This can be different in the case of jumbo reverse mortgages, taken out on estates valued at $1 million or more. 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.
This can also be different if the homeowner wants to keep the house in the family. In that case, a child or family member can take out a new mortgage after the original homeowner dies. The estate can also repurchase the house from the lender at 95% of its value.
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?
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, it’s 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.