If a reverse mortgage borrower sells the home or moves away permanently, the loan becomes due and payable. But the truth is, most reverse mortgage borrowers use the loan to age in place, leaving repayment of the loan to their heirs. As with any mortgage, the borrower could be subject to foreclosure for failing to maintain the property, pay property taxes and homeowners insurance, and otherwise comply with loan terms.
While this might surprise some heirs at first, they have nothing to fear. Indeed, among the many attractive features of a reverse mortgage is that neither the reverse mortgage holder nor the heirs can ever owe more on the loan than the value of the home.
Here are answers to 10 other questions that heirs need to know if they inherit a home on which there is a reverse mortgage:
Reverse Mortgage Fact #1. Does ownership of the home automatically revert to the lender after the reverse mortgage borrower passes?
No. The heirs are the owners, with the right to decide whether they want to repay the loan balance and keep the home, sell the home and keep the equity, or let the lender dispose of the property if there’s no equity.
Reverse Mortgage Fact #2. What happens if the reverse mortgage has an unused line of credit?
The unused portion of the line of credit doesn’t pass to their heirs. In other words, if the reverse mortgage borrower had used $50,000 of a $200,000 reverse mortgage line of credit, the remaining $150,000 on the line does not pass to the heirs for their use. As for the outstanding $50,000 loan amount, the heirs should select the repayment option that advantages them the most.
Reverse Mortgage Fact #3. What if the reverse mortgage borrower had been on a term payment plan, receiving monthly payments for a set number of years?
Again, these payments cease. They don’t pass to the heirs.
Reverse Mortgage Fact #4. So, can I presume that tenure payments (payments based on the borrower’s life span) also cease upon the borrower’s passing?
Yes.
Reverse Mortgage Fact #5. When might it make sense for the heirs to keep the house?
Let simple math answer this question. If the loan amount is small and the value of the home is large, there should be a lot of equity for the heirs, which presents options. They may choose to sell the property and retain any remaining equity. Alternatively, if they wish to retain ownership, they might choose to pay off the loan with personal funds or savings or by refinancing the loan, even with another reverse mortgage if they are 62 or over. As a further inducement, heirs can pay off the loan at the lower of the amount owed or 95% of the home’s appraised value.
Reverse Mortgage Fact #6. What if the home is worth less than the reverse mortgage?
As mentioned, a reverse mortgage is a non-recourse loan, meaning if there is a shortfall (the loan balance is greater than the home’s value), the heirs owe nothing, and the lender cannot look to any other assets to repay the money.
Heirs could simply walk away and do nothing, triggering a foreclosure process. A better way would be for the heirs to simply transfer the home’s deed to the lender voluntarily. This process is known as a deed-in-lieu. In exchange, the lender forgives the amount left on the loan.
Reverse Mortgage Fact #7. How long do heirs have to determine their course of action?
When a reverse mortgage homeowner dies, the lender must formally notify the heirs that the loan is due. They do this by sending a letter that outlines the rules and options available to the heirs. Beneficiaries are then given 30 days to figure out their next steps.
If the heirs decide that selling the home is their best option, they have up to six months to sell the property. Subject to HUD approval, heirs may also apply for two three-month extensions.
Reverse Mortgage Fact #8. What rights does a surviving co-borrower have?
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 as long as they comply with all loan terms, which include keeping up the home along with the taxes and homeowners insurance on the property. Just because the home has passed to the heirs, the terms of the loan do not change. Any cash proceeds that the married couple had been receiving from their reverse mortgage also continue for the surviving spouse.
Reverse Mortgage Fact #9. What rights does a surviving non-borrowing spouse have?
An eligible non-borrowing spouse is the spouse not listed as a borrower on the Home Equity Conversion Mortgage (HECM) or reverse mortgage contract. This designation could have happened for a variety of reasons. For instance, one spouse may not yet have been 62 at the time of loan application, the minimum age requirement for a reverse mortgage.
Whatever the reason, it is vital that the eligible non-borrowing spouse be designated as such on the loan contract. This all-important designation means that if the borrower passes away while the loan is still active, the eligible non-borrowing spouse is eligible to remain in the home, provided they maintain the home, continue the payment of property taxes and homeowners insurance, and otherwise comply with the loan terms.
Also, reverse mortgage disbursements cease upon the borrower’s death. They don’t pass to the eligible non-borrowing spouse. Only borrowers of the reverse mortgage loan can access loan proceeds.
Reverse Mortgage Fact #10. Can other family members continue living in the home after the last surviving co-borrower member or eligible non-borrowing spouse passes?
Reverse mortgages are not multi-generational loans. If family members are heirs but not listed as a borrower, co-borrower, or eligible non-borrowing spouse, they must be prepared to repay the loan, according to the options outlined above. If their desire is to remain living in the home, they can purchase it with personal funds or savings, apply for a traditional mortgage or refinance, or even another reverse mortgage, if they are 62 or older.
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If you are the heir of a late reverse mortgage homeowner, open communication with your reverse mortgage servicer as soon as possible. The servicer is an excellent resource and sounding board for answering all your questions, laying out and explaining all your options, and ensuring this important life transition proceeds smoothly and successfully.
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice. Consult your financial advisor before implementing any financial strategies.
