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.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Save up to 74%Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger’s Social Security Solutions today.
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? ›
Heirs who want to keep the home can face problems if it has a reverse mortgage that they cannot repay. A traditional fixed-rate forward mortgage can offer these heirs a funding solution, but they may not always qualify. If they cannot repay the debt, the home must be sold to satisfy the reverse mortgage debt.
How long do a reverse mortgage borrower's heirs have to decide what to do with the property after the borrower passes away in NC? ›
Reverse mortgage foreclosure timeline
Once a reverse mortgage homeowner dies, the lender sends a letter to the heirs explaining that the loan is due. Beneficiaries then have 30 days to figure out how they want to proceed.
Can a family buy back a house on a reverse mortgage? ›
If the borrower's heirs want to keep the home, they can simply take out a new mortgage on the house to pay off the balance of the reverse mortgage. This is much like refinancing the loan as the original borrower. The heirs can then use the home however they wish, so long as their mortgage allows for it.
Who owns the house at the end of a reverse mortgage? ›
When you take out a reverse mortgage loan, the title to your home remains with you. This webpage has information about HECMs, which are the most common type of reverse mortgage. Most reverse mortgages are Home Equity Conversion Mortgages (HECMs).
What heirs need to know about reverse mortgages? ›
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.
Why are so many people disappointed by reverse mortgages? ›
Smaller Inheritances and Greater Hassles for Any Heirs
A reverse mortgage can also deplete much of the homeowner's wealth, especially if their home is basically all they have, leaving little behind for their heirs.
How many people have lost their homes due to a reverse mortgage? ›
A USA TODAY review of government foreclosure data between 2013 and 2017 found that nearly 100,000 reverse mortgage loans have failed, burdening elderly borrowers and their families and causing property values in their neighborhoods to crater.
How long can a mortgage stay in a deceased person's name? ›
No, a mortgage can't remain under a deceased person's name. When the borrower passes away, the loan won't disappear. Instead, it needs to be paid. After the borrower passes, the responsibility for the mortgage payments immediately falls on the borrower's estate or heirs.
Are heirs responsible for debt? ›
If there's no money in their estate, the debts will usually go unpaid. For survivors of deceased loved ones, including spouses, you're not responsible for their debts unless you shared legal responsibility for repaying as a co-signer, a joint account holder, or if you fall within another exception.
The easiest way to stop a reverse mortgage is to exercise your right to rescission. This right is a form of consumer protection that enables you to walk away from a reverse mortgage without penalty, for any reason, within three days of signing the loan agreement.
What happens if you live too long on a reverse mortgage? ›
If the end of your term is up before you pass away, then you have outlived your reverse mortgage proceeds. With a term payment plan, you reach your loan's principal limit—the maximum that you can borrow—at the end of the term. After that, you won't be able to receive additional proceeds from your reverse mortgage.
Can you walk away from a reverse mortgage? ›
The Right of Rescission
If a borrower chooses to change their mind about a reverse mortgage, they only have to alert their lender in writing within the allowable three business days from signing.
What is the dark side of reverse mortgage? ›
You still have home-related expenses
A reverse mortgage doesn't let you off the hook for property taxes, homeowners insurance premiums and HOA fees. If you fail to pay any of these expenses in a timely manner, that violates the reverse mortgage agreement and your home could be foreclosed.
Is it hard to sell a house that has a reverse mortgage? ›
Selling a house with a reverse mortgage isn't as simple as selling a home with a traditional mortgage — but it can be done with a little planning. With a reverse mortgage, you borrow against the equity in your property to receive cash upfront or a stream of monthly payments.
Who has the title in a reverse mortgage? ›
A reverse mortgage loan, like a traditional mortgage, allows homeowners to borrow money using their home as security for the loan. Also like a traditional mortgage, when you take out a reverse mortgage loan, the title to your home remains in your name.
What is the bad side of reverse mortgages? ›
A reverse mortgage isn't free money: The borrowing costs can be high, and you'll still need to pay for homeowners insurance and property taxes. Reverse mortgages can also complicate life for your heirs, especially if they don't want the home or the home's value isn't enough to cover what's owed.
Can you inherit reverse mortgage debt? ›
Heirs or family members are not inherently responsible for the reverse mortgage debt. They are only responsible for the outstanding debt if they decide they want to keep the property or handle the sale of the property.
Why do banks not recommend reverse mortgages? ›
While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky: A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you're still borrowing the money and paying the lender a fee and interest.
