Once a reverse mortgage borrower passes away or leaves the home permanently, the loan will enter a due and payable status.
If the borrower has passed away, his or her heirs are responsible for repaying the loan. They can do this by selling the home, or through any other means that are available to them if they wish to keep it.
Typically within a month from the borrower’s passing, the heirs will receive a condolence letter from the lender, which begins the process for repaying the loan.
The time frame for repayment, if the heirs receive all time extensions allowed by the Department of Housing and Urban Development, is one year from the time the loan becomes due. Specifications on time extensions are provided by HUD in its handbook.
The Loan Balance
Because a reverse mortgage is a negative amortized loan, the loan balance grows over time.
Depending on how long and the amount of loan proceeds you’ve received from your reverse mortgage, there is a chance that the loan balance could grow and be higher than the home’s value.
The good news is that borrowers and their heirs are protected if this happens as long as they sell the home to repay the loan. This protection is due to the fact that reverse mortgage loans are insured by the Federal Housing Administration (FHA).
Through the FHA’s insurance program, borrowers and their heirs are provided the assurance that the amount owed on the loan can never be more than the value of the home at the time of sale.
This means that even if the home loses value over the course of the loan to a point where the home is appraised at a value that is less than the loan balance, your heirs can sell the home to an unrelated party and will only be responsible for repaying the lesser of the unpaid mortgage balance or 95% of the home’s appraised value.
If the home appreciates in value over time to exceed the loan balance, the heirs can keep any remaining proceeds left over from the home sale after they repay the reverse mortgage.
What Happens to Other Residents of the Home?
Anyone else who lives in the home with the reverse mortgage borrower and is not named on the title will not be able to continue living in the home once the borrower passes away, unless that person inherits the home and repays the loan.
For this reason, is very important to consider any non-borrowing spouses or adult children who are full-time residents in the home when you decide to take out a reverse mortgage.
All borrowers and non-borrowing spouses must go through Home Equity Conversion Mortgage Counseling as a requirement of obtaining the loan.
Lenders and reverse mortgage counseling agencies strongly encourage family members to attend counseling to ask questions about the loan and learn how it will impact the heirs to the estate.
A Family Conversation
While discussing what happens after a reverse mortgage borrower’s death is a sensitive topic, it’s important to know what to expect so that you and your family can be best prepared.
This is another reason it is strongly encouraged for these family members to be engaged in discussions throughout the reverse mortgage process.
Do you have questions about what happens when a reverse mortgage borrower passes away? Reach out here and ask.