If you have a reverse mortgage, let your heirs know. Soon after you die, your lender must be repaid. Heirs will need to quickly settle on
a course of action.
Tighter Rules on Reverse Mortgages
If one spouse has died but the surviving spouse is listed as a borrower on the reverse mortgage, he or she can continue to live in the home, and the terms of the loan do not change. At the death of the last borrower, though, adult children and other nonspouse heirs must pay off the loan. They can keep the property, sell the property or turn the keys over to the lender—and their decision is "usually driven by whether there's equity left in the property," says Joseph DeMarkey, a principal member of Reverse Mortgage Funding.
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A reverse mortgage allows seniors age 62 or older to tap their home equity. Nearly all reverse mortgages are federally backed Home Equity Conversion Mortgages. The homeowner doesn't make payments on the loan while living in the house, but the loan becomes due at the death of the last borrower.
Heirs get an initial six months to deal with the loan payoff. And it's to their advantage to move as quickly as possible. Until the loan is settled, interest on the balance and monthly insurance premiums will continue to eat into any remaining equity.
The good news for heirs is that reverse mortgages are "nonrecourse" loans. That means if the loan amount exceeds the home's value, the lender cannot go after the rest of the estate or the heirs' other assets for payment. "The estate can never owe more than the value of the property," says Gregg Smith, president and chief operating officer of One Reverse Mortgage.
The difference is covered by federal mortgage insurance, which the borrower pays while holding a HECM. If there is leftover equity after the loan is paid off, that money goes to the estate.
When the last owner dies, the estate's executor should contact the lender. (Lenders keep track of databases that note deaths and will send a notice to heirs if records indicate the last borrower has died.) Loan proceeds disbursed as monthly payments will stop. If the borrower took a line of credit, that line will be closed.
When It Makes Sense to Keep the House or Sell
Within 30 days of notification, the lender will send a federally approved appraiser to determine the home's market value. The amount that's due to the lender is the lesser of the reverse mortgage loan balance or 95% of the appraised market value of the home.
Say the appraiser determines the home is worth $200,000 and the loan balance is $100,000. To keep the house, the heirs need to pay the loan balance of $100,000. If the house is sold, the heirs get any equity above the $100,000 loan balance.
But say the home declined in value during the housing slump and the loan now exceeds the home's appraised value—the home is appraised for $100,000, but the loan balance is $200,000. To keep the home, the heirs will need to pay $95,000—95% of the $100,000 market value. The heir doesn't have to pay the full balance; the government insurance covers the remaining loan amount.
If the heirs decide to sell this house, the home must be listed at a minimum of the appraised value. (The 5% difference helps cover the costs of selling.) Because all sale proceeds go to pay off part of the loan and real estate fees, the estate receives no equity. The government insurance picks up the difference on the loan.
But if there is no potential equity, heirs may decide to simply hand the keys to the lender and avoid the hassle of trying to sell the home. Known as "deed in lieu of foreclosure," the heirs sign the deed over to the lender. "If the property was underwater, the heirs may have no interest in selling it or keeping it," says Diane Coats, senior operational oversight specialist for Generation Mortgage.
Heirs can request up to two 90-day extensions. To get that full year, they must show evidence that they are arranging the financing to keep the house, or they are actively trying to sell the house, such as providing a listing document or sales contract.
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FAQs
Are heirs responsible for reverse mortgage debt? The loan is a non-recourse debt, meaning that the property is the only security the lender and HUD have for the loan. If the heirs wish to keep the home, they must repay the loan or 95% of the current property value, whichever is less, but that would be their choice.
What are the problems with heirs with reverse mortgages? ›
Your heirs might not have the money pay off the loan balance when it is due and payable, so they might need to sell the home to repay the reverse mortgage loan. When the loan is due and payable, your home might be worth more than the amount owed on the reverse mortgage.
Who owns the deed in a reverse mortgage? ›
When you take out a reverse mortgage loan, the title to your home remains with you.
What disqualifies you from getting a reverse mortgage? ›
You have federal debt
If you owe federal tax debt or have a federal student loan, you cannot move forward with a federally-backed reverse mortgage. In some cases, you may be able to get your loan if you repay your federal debt using the loan proceeds.
Who benefits most from a reverse mortgage? ›
A reverse mortgage is a type of loan that is used by homeowners at least 62 years old who have considerable equity in their homes. By borrowing against their equity, seniors get access to cash to pay for cost-of-living expenses late in life, often after they've run out of other savings or sources of income.
What rights do heirs have in a reverse mortgage? ›
After the passing of the last surviving borrower, the reverse mortgage loan balance becomes due and payable. Your heirs can decide whether to repay the loan balance, keep the home, sell the house, and keep the equity, or walk away and let the lender dispose of the property.
What is the 95% rule on a reverse mortgage? ›
If your reverse mortgage loan is in default and you've received a notice that the loan is “due and payable,” you may sell your home for 95 percent of its appraised value. The money from the sale will then go towards the outstanding loan balance and any remaining balance of the loan is paid for by mortgage insurance.
Is it hard to sell a house that has a reverse mortgage? ›
Selling a home that has a reverse mortgage can be tricky, and isn't quite the same as selling one with a traditional mortgage (or no mortgage at all). However, it can be done if you understand the process. Before you make a decision, learn more about how to sell a house with a reverse mortgage.
Does a reverse mortgage put a lien on your house? ›
A reverse mortgage shall constitute a lien against the subject property to the extent of all advances made pursuant to the reverse mortgage and all interest accrued on these advances, and that lien shall have priority over any lien filed or recorded after recordation of a reverse mortgage loan.
What happens if you can't pay back a reverse mortgage? ›
Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage loan, require that you keep current on your property taxes and homeowners insurance. Failure to pay either may lead to foreclosure.
It is worth mentioning that all HECMs are subject to the 60% utilization rule. This limits the amount any reverse mortgage borrower can take in the first year to the higher of 60% of the principal limit or mandatory obligations like an existing mortgage plus 10% of the loan amount.
What is the bad side of reverse mortgages? ›
Relatively High Fees
Real estate closing fees: As with a regular mortgage, reverse mortgages can rack up a variety of closing costs, including a home appraisal and inspection, title search, recording fees, mortgage taxes, and a credit check of the applicant, among others.
Can I lose my home with a reverse mortgage? ›
The problem, say advocates, is that many senior homeowners don't understand the fine print in a reverse mortgage. Some wrongly assume the lender will pay the taxes and insurance. But fall behind on those payments or fail to maintain the home, and the lender can foreclose.
What is the biggest problem with reverse mortgage? ›
Your debt keeps going up (and your equity keeps going down) because interest is added to your balance every month. This can use up much – or even all ─ of your equity. A reverse mortgage can limit your options down the road. Generally, a reverse mortgage must be paid back when you die or move from the home.
Who is not a good candidate for a reverse mortgage? ›
Who is not a good candidate for a reverse mortgage? A reverse mortgage is a questionable proposition if you have sufficient income to pay your bills or are willing to sell your home to tap into the equity. If that's the case, it may make more sense to just sell it and downsize your home.
How much money do you actually get from a reverse mortgage? ›
The amount of money you can get from a reverse mortgage usually ranges from 40% to 60% of your home's appraised value. The older you are, the more you can receive because loan amounts are based on your age and current interest rates. Several factors determine the loan amount: The age of the youngest borrower.
Why people don t like reverse mortgages? ›
Relatively High Fees
Real estate closing fees: As with a regular mortgage, reverse mortgages can rack up a variety of closing costs, including a home appraisal and inspection, title search, recording fees, mortgage taxes, and a credit check of the applicant, among others.
Do people lose their homes with a reverse mortgage? ›
The lender cannot foreclose on an HECM and the borrower cannot lose the home. The borrower cannot outlive a reverse mortgage. Implications that a reverse mortgage is not a loan, but instead a government benefit or entitlement.
