How Does a Reverse Mortgage Work When You Die?

When you first heard about getting a reverse mortgage, you were excited and relieved. You had finally found a way to continue funding your lifestyle without having to worry about your medical and other expenses. A reverse mortgage is meant to help you get a loan based on your home’s equity without forcing you out of your home. But what happens when seniors die?

If you are curious about a reverse mortgage or its effects, it’s time to learn about them before you jump in.

What is a reverse mortgage?

A reverse mortgage is a loan tied to the value of your home that is available to seniors over the age of 62. Unlike most home equity loans, reverse mortgages do not require you to make payments. You might have heard it called a Home Equity Conversion Mortgage (HECM) because most reverse mortgages are HECMs.

Instead of asking for mortgage payments, a reverse mortgage balance becomes due when the borrower moves away, sells the house, or dies. If there are two borrowers on the reverse mortgage, the mortgage becomes due and payable when the last surviving borrower has passed away.

There’s a lot more to reverse mortgages, so if you want to learn more, you should read our article on reverse mortgages here.

What are the benefits of a reverse mortgage?

There are several benefits of reverse mortgages that make them worth your time. These are the best reasons why you may want to look into this:

• You don’t have to worry about the money owed until the last surviving borrower dies.
• This allows you to borrow money in a lump sum, monthly payments, or line of credit using your home’s equity.
• You and your family can continue to live in the home as long as you live.
• This FHA-backed loan type also means that you can’t borrow more than the value of the home. This means your family won’t be liable for payments after you die.
• Most reverse mortgage loans are federally insured.

How does a reverse mortgage work when you die?

With a forward mortgage, you make monthly payments to the mortgage lender while you are alive. Reverse mortgages work differently. With a reverse mortgage, your mortgage lender makes payments to you first. Then, when you die, the loan balance becomes due.

Once the last surviving borrower dies, the reverse mortgage becomes due. This means that you are going to have to pay off the loan or risk foreclosure. Depending on the way the loan is structured and your financial situation, this could lead to your heirs or surviving spouse being left without a home.

There are several different ways that this can unfold. In most cases, the home will be sold. Whatever the situation when the last borrower dies, if you, as an heir or spouse, have enough money to pay off the loan, you usually can.

How to pay back a reverse mortgage after a death

There are several ways to pay back a reverse mortgage after a loved one’s death. Let’s talk about the most common ways reverse mortgage balances get resolved after the last borrower passes away.

Sell the home

The most common way survivors handle outstanding reverse-mortgage debt is to sell the home immediately after the borrower dies. The money from the sale proceeds will be used to pay off the loan. If the sales price exceeds the balance owed, the survivors (spouse, heirs) will normally receive the excess.

If the sales price of a Home Equity Conversion Mortgage falls short of the money owed, the FHA rules out further lender efforts to collect from other borrowers, a spouse, or heirs. This means that HECMs are non-recourse loans. For reverse mortgages that are not HECMs, you will need to review the loan terms closely or talk to your loan provider to determine what will happen if the home sells for less than what’s owed.

Keep the house

If you want to keep the house, you are going to have to do a little leg work. You will have to find the funds to pay off the reverse mortgage loan amount as soon as you can. This money can come from a variety of places, including:

• Life insurance funds
• Personal savings
• Inheritance from the borrower

Handing over the keys

It’s important to realize that trying to pay off the home will not always work, and sometimes, the balance owed will be higher than the market value of the home. If this is the case, then your best bet is to hand over the keys and deed to the house. This can help prevent a foreclosure and streamline the end of the loan.

Have a child take out a forward mortgage

If you want to keep the home in the family rather than sell the home, there’s an easier way to repay the loan. You can have a child take out a forward mortgage to pay off the remaining equity. This will allow you to keep the home while you make monthly payments to cover the equity lost from the reverse mortgage.

How reverse mortgages affect spouses and partners

Partners and spouses can be mortgage borrowers alongside the homeowner, depending on how things are arranged. It’s important to understand how this will help or harm your family members if you want to do the right thing.

When you have a reverse mortgage, your heirs can inherit the home. But the title will not be free and clear because there is a mortgage on it. This mortgage has to be repaid in order to clear the title and keep the home.

If your spouse or partner is a co-borrower

This presents the fewest problems for a surviving spouse. If you die first, you co-borrower spouse won’t have to move out. HECMs do not come due until all borrowing parties have died or permanently moved out. This can help buy time to get more funds.

If your spouse or partner isn’t a co-borrower

This can be rough. A spouse who isn’t a co-borrower will have to find a way to pay off the reverse mortgage. Whether a non-borrowing spouse can stay in the home without repaying will vary based on the mortgage terms and how long the two of you have been married.

Since 2014, the rules on reverse mortgages and their effects on spouses have changed. They now provide more flexibility to grieving spouses. You should be able to stay in the house without actually having to pay off the loan if the following are true:

• You are named as a spouse on the reverse mortgage paperwork.
• The home in question was your primary residence when the mortgage was issued.
• You were the borrower’s spouse when the HECM was issued.

How to create a payoff plan for a reverse mortgage

If you intend on getting a reverse mortgage for your home, you need to be aware of what it means for your heirs and spouse when it becomes due and payable. If you go forward with your plan to get a reverse mortgage without informing and preparing those you may leave behind, they could panic when they find out.

Get a will

Wills are one of the best ways to ensure that everyone is on board with the plan. A good will ensures that your family members know how to repay the loan and can actually set repayment up to happen automatically.

In some cases, a will can also help your family protect the assets that are meant to repay the loan from heirs who are known for being bad with cash.

Make sure your records are up to date

If you want to make sure that your heirs do not have to sell the home, it’s best to keep all your records up to date. This means you should have a folder with information about the following:

• The loan amount. Not all loans are going to be for the full market value of the home. Some may be for more, some for less.
• Any improvements or upgrades you’ve made to your home. This can help your heirs get an important tax credit that can reduce the amount of money they have to pay.
• What type of loan balance you have. If it’s a line of credit that’s barely been used, your heirs should know this when they make a decision.

FAQ

Who pays the reverse mortgage when the owner dies?

When the mortgage borrowers die, the estate’s heirs are often going to be the ones who have to pay off the loan.

Are heirs responsible for reverse mortgage debt?

In the case of HECMs, your heirs will have to pay off the loan or pay 95% of the home’s appraised value, whichever amount is lower, if they want to keep the property. They are not responsible for the debt, however, as HECMs are non-recourse loans. In other words, the burden of debt repayment is fulfilled by the borrower’s home equity. You can’t be sued for the reverse mortgage amount, though lenders can foreclose on the property.

Only a small minority of reverse mortgages are non-HECMs. Though a non-borrowing spouse and heirs will not be responsible for most debts of the deceased, the estate may be. If the mortgaged property is not the only thing of value in the estate, estate value could be lost due to outstanding debts. Take time to thoroughly understand the terms of any reverse mortgage or other debt that might affect your estate. (It also doesn’t hurt to think a bit about estate taxes.)

Can a family member take over a reverse mortgage?

Sadly, family members cannot take over a reverse mortgage, nor can they be added to one.

What is the downside of a reverse mortgage?

A reverse mortgage means that you are taking out a loan from your home equity. This means that your heirs will inherit less of your estate, regardless of what they decide to do. They still have to make sure that the loan is repaid.

Moreover, you still have to keep the home in good shape, pay your property taxes, and fulfill similar responsibilities of homeownership to avoid a foreclosure sale. You also still have to cover your property taxes while you live there. In some cases, this may mean that you won’t be able to make payments. This could lead to an early foreclosure.

The bottom line

A reverse mortgage can be a great way to cash in on your home’s market value without having to worry about making monthly mortgage payments while you’re alive.