What happens When You Die With A Reverse Mortgage?

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    What happens when you die with a reverse mortgage

    Reverse mortgages allow senior homeowners to occupy their house without making additional payments and supplements their monthly income. But what happens to this mortgage after your death? Who pays the loan balance, and how it affects your heirs? 

    Read this guide about how a reverse mortgage follows after the primary borrower dies.

    What Happens To A Reverse Mortgage When You Die?

    On a reverse mortgage, you don’t make a monthly payment. The mortgage doesn’t become Due and Payable until the last borrower dies or leaves the house unless they fail to make necessary home improvements or do not pay property taxes and/or insurance timely. Borrowers can defer loan balance payments until it becomes Due and Payable.

    If the borrower dies before permanently moving off the house, the eligible spouse, co-borrower, or the heirs are held responsible for repaying the mortgage.

    In A Reverse Mortgage Who Owns The House?

    With a reverse mortgage, you legally the own your home and owe a smaller amount at the loan origination. This smaller amount increases until you die or permanently leave the house.

    However, there are some restrictions like you cannot rent out the home or use it for home-based businesses while you are occupying it. This is because the aim of a reverse mortgage is to help retirees keep their home as their primary residence.

    The interest amount accumulates over time. Therefore, you owe more when it is the time to pay back the loan. The loan is usually repaid by selling the home on the reverse mortgage.

    Spouses and heirs have both rights and obligations

    Spouse’s Responsibility after Death of the Borrower: If the spouse dies, the surviving partner owns the property with the reverse mortgage. If he or she is a co-borrower on the mortgage, s/he may keep occupying the property as long as all conditions are met.

    New reforms made by the Reverse Mortgage Stability Act provide non-borrowing spouses protection as well. According to the new HUD policy, if an FHA-backed reverse mortgage was borrowed on or after August 4, 2014, the non-borrowing spouse may occupy the house after the primary borrower dies. In both cases, repayment can be deferred until after their death.

    However, these are applicable if the non-borrowing spouse:
    • Is wedded to the borrower during closing and stays wedded to the borrower for the lifetime
    • Discloses his or her  spousal status at the loan origination and closing
    • Is listed in the HECM documents
    • Has kept and continues to keep the home as a primary residence
    • Can prove his or her legal ownership of the house within 90 days after the death of the borrower
    • Meets all of the obligations stated in the mortgage documents
    • Ensures the loan is never Due and Payable
    Heir’s Responsibility after Death of the Borrower: An FHA HECM loan is a non-recourse loan. So when the last surviving borrower dies, the heirs will not be held responsible for paying more than the home’s value. Heirs can either pay 95% of the current home’s value or the outstanding balance, whichever is less.

    The loan servicer notifies the estate of the homeowner of the “Due and Payable” loan balance, informing the mortgage must be paid back. Heirs dealing with a reverse mortgage have the following three options:

    • Occupy the home: Heirs may choose to keep the home by paying off the loan balance.
    • Sell the home: Heirs may sell the home to pay off debt. In some cases, the principal balance comes out to be higher than the property’s appraised. In such cases, the heirs have to repay 95% of the home’s value or the outstanding balance, whichever is less. The reverse mortgage lender will request reimbursement from their insurance with the Federal Housing Administration (FHA). If the house sells for more money than the outstanding loan balance upon death, the heirs keep the remaining funds.
    • Deed the property to the lender: When no excess equity is left, releasing the property to the lender helps avoid foreclosure. In this scenario, the heirs move out of the home with no financial obligations.

    What if you have a reverse mortgage with no heirs?

    If you have no heirs, probate courts will liquidate the home, and the proceeds are used to pay back the remaining loan balance. In such cases, a loan servicer may also initiate foreclosure after your death.

    You can also unlock the equity of your home to use the money for your own comfort, enjoyment, and other purposes than aggressively repaying the mortgage.

    Conclusion: Have A Plan In Place

    Communicating the nature of the reverse mortgage and available options with your heirs can help prepare your family for what comes next after your death.

    If you’re still unsure what happens when you die with a reverse mortgage, don’t hesitate to contact Brett Stumm, a reverse mortgage specialist, who happily and satisfactorily answer your questions and help you plan it.

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