How To Handle a Reverse Mortgage After Death
Reverse mortgages allow seniors to take out a home loan without worrying about making monthly payments. But how does a reverse mortgage work after death? Unlike with most home loans, the borrower’s death can trigger the loan’s full, unpaid balance to come due.
Understanding how to deal with a reverse mortgage after the death of the borrower isn’t always simple, and repaying the loan can look very different, depending on your available home equity and whether you want the house to stay in the family.
If you’re a reverse mortgage borrower, it’s important to have a plan to deal with your loan after you die. And if you’re a family member, you’ll need to understand what your options might be for keeping the house, as well as your responsibility for paying off the loan.
A reverse mortgage is a second mortgage that lets seniors (age 62 and over) convert their home equity into cash. The loan proceeds may come in the form of a lump sum, monthly payouts or a combination of the two.Home equity conversion mortgages (HECMs) are the most common type of reverse mortgage and are backed by the Federal Housing Administration (FHA). For that reason, we’ll treat HECMs as the default reverse mortgage type throughout this article.
How does a reverse mortgage work when you die?
Once the borrower dies, the payoff process for a reverse mortgage depends on when the borrower(s) stop living in the home that secures the loan. This makes your spouse’s status — whether they’re a co-borrower on the mortgage or not — crucial.
If your spouse or partner is a co-borrower
When you and your spouse are co-borrowers on a reverse mortgage, neither of you have to pay back the mortgage until you both move out or both die. Even if one spouse moves to a long-term care facility, the reverse mortgage doesn’t have to be repaid until the second spouse moves out or dies.
If your spouse or partner is not a co-borrower
If your spouse is not a co-borrower on your reverse mortgage, then they may have to repay the loan within 30 days of the last date you lived in the home. As for whether they can remain in your home without repaying, that depends on when you took out the HECM loan and how long you’ve been married. To find out more, click on the option below that’s relevant to your situation.
If a reverse mortgage borrower took out their HECM before Aug. 4, 2014, then a nonborrowing spouse doesn’t have a guaranteed right to stay in the house. The lender may choose to start foreclosure proceedings or, on the other hand, it might permit the nonborrowing spouse to stay in the home. In cases where the lender allows it, the nonborrowing spouse may stay in the house by certifying specific information each year, which includes confirming that:
- The nonborrowing spouse was married to the borrower when the reverse mortgage was originated and upon the borrower’s death.
- The nonborrowing spouse does and has lived in the home as a primary residence.
- They’ll provide their Social Security number or Tax Identification Number.
- They’ll continue to meet all loan obligations and agree to no longer receive any payments from the loan.
The rules are different for HECM loans that were issued after Aug. 4, 2014. With these loans an eligible, nonborrowing spouse can stay in the home after the borrowing spouse moves out or dies, but only if they meet these criteria:
- They must have been married to the reverse mortgage borrower at the time the loan was issued.
- They must be named as a spouse in the HECM documents.
- They must live and have lived in the home as their primary residence when the reverse mortgage loan originated.
If you’re an eligible nonborrowing spouse, the reverse mortgage won’t need to be repaid until you die or move out of the house.
How long do you have to pay back a reverse mortgage?
As mentioned above, heirs typically have 30 days after the borrower’s death to repay the mortgage. However, lenders may approve a 90-day extension if the borrower’s heirs plan to sell the home or obtain funding to pay it off and need more than 30 days to do so.
5 options for paying off a reverse mortgage after death
- Sell the home. Usually, the borrower’s heirs pay off the loan by selling the house securing the reverse mortgage. The proceeds from the sale are used to pay off the mortgage. If there’s any money remaining after the loan is paid off, the heirs get to keep it.
- Make a short sale. The heirs of a HECM borrower who was underwater on their house can satisfy the loan by selling the house for 95% of its appraised value and using the proceeds to pay the HECM. (Selling a home for less than you owe on your mortgage is known as a “short sale.”). Even though the sale may not cover the full balance due on the loan, the FHA doesn’t allow lenders to come after borrowers or their heirs for the difference.
- Opt for a deed in lieu of foreclosure. Many reverse mortgage borrowers die with loan balances that are higher than their home’s value. When heirs inherit an underwater house, they may decide that the easiest option is to simply hand ownership of the home over to the lender using a deed in lieu of foreclosure. This saves everyone from having to go through the long and costly foreclosure process. Choosing this option won’t hurt your heir’s credit score. (HECM borrowers who want to get out of their reverse mortgage can also use a deed in lieu to do so, but it will hurt their credit score.)
- Take out a forward mortgage. An heir who wants to keep a house can pay off the HECM with their own funds but, if they don’t have that much cash on hand, they may want to refinance the home to cover the full reverse mortgage balance. If the balance on the reverse mortgage is higher than the home’s value, heirs can buy the house for 95% of its appraised value.
- Refinance into a new reverse mortgage. If the original borrower’s heirs are at least 62 years old, they may be able to refinance into a new reverse mortgage with better terms. As with all reverse mortgages, the loan amount will depend on the borrower’s age, home value and interest rate.
How to create a payoff plan for a reverse mortgage
If you’re a reverse mortgage borrower, creating a plan for how your heirs will pay off the loan after you die can offer great peace of mind. Don’t forget to make sure they have the information and tools they’ll need to execute your wishes.
Here are the steps you’ll need to take:
Step 1. Get a will
Make sure you have a will before taking out a reverse mortgage to ensure all your assets (including your house) are transferred to the correct person upon your death. Without a will, you won’t get to say who inherits your home — a judge will decide based on your state’s laws. A will is particularly important for reverse mortgage borrowers who have a spouse or long-term partner living with them.
Step 2. Make sure your records are up to date
Under current tax laws, borrowers who use a reverse mortgage to buy or substantially improve their home may be eligible for a mortgage interest tax deduction when the reverse mortgage is paid off. But the only way to prove whether the interest is deductible is to keep records that show exactly how you used the funds from a reverse mortgage.
Step 3. Meet with a housing counselor
A housing counselor can help clarify complex reverse mortgage rules and assist you in creating a plan for your heirs. The U.S. Department of Housing and Urban Development (HUD) maintains an online list of counselors, or you can call 800-569-4287.
Step 4. Consider unexpected early payoff
While it’s typical for a borrower’s death to trigger repayment of the reverse mortgage loan, there are also many other circumstances that can have the same effect. Common scenarios include selling the home, moving out to live in a long-term care facility or even failing to maintain the home or pay property taxes or homeowners association fees. It’s important to have a “plan B” in place, just in case you aren’t able to live out the rest of your life in your home.
Step 5. Choose an executor
It’s great to create a plan, but without someone who understands and is capable of overseeing that plan there’s a lot of room for things to go awry. Choose someone you trust — and who, ideally, is very comfortable dealing with finances — to execute your will.