What Happens to Heirs When a Reverse Mortgage Borrower Dies?
What if your parent or spouse dies, and he or she had a reverse mortgage on her house? Do you inherit the house? Do you have to repay the reverse mortgage loan? Will the reverse mortgage lender make you sell the deceased’s belongings or empty his or her bank accounts to repay the loan? Do heirs have to repay the loan? What happens if you live in the house? This article answers these questions and explores the rights of reverse mortgage heirs.
Reverse Mortgages at A Glance
A reverse mortgage is the opposite of a conventional mortgage. Instead of a prospective homeowner borrowing a lump-sum from a lender to buy a house and then repay the loan over time, a reverse mortgage operates, well, in reverse. In a reverse mortgage, a homeowner receives monthly payments, several lump sums, or one lump sum. In both a conventional mortgage and reverse mortgage, the house is the collateral for the loan. Almost all reverse mortgages offered in the US follow rules set by the FHA. The FHA calls reverse mortgages Home Equity Conversion Mortgages (HECMs) and has clear borrower and property qualifications it requires of homeowners. The three key requirements for a reverse mortgage are:
- The homeowner or homeowners must be age 62 or older
- The homeowner must have a substantial amount of equity in their home
- Before a loan application is accepted, the homeowner must attend counseling to understand the positives and negatives of a reverse mortgage
Reverse Mortgage & Death
Like a conventional mortgage, a reverse mortgage is a claim, which the legal world calls an encumbrance, on a property’s title. Three conditions are built-into reverse mortgages that allow lenders to foreclose or otherwise demand the loan be repaid:
- The home is sold
- The borrower stops using the home as his or her primary residence
- The borrower dies
When one of these three occur, the cash, interest, and other HECM finance charges must be paid. The key question is, who must repay the loan?
Reverse Mortgage Heirs Responsibility
The lender has the right to foreclose when a homeowner with a reverse mortgage dies. If the lender forecloses, neither the decedent’s estate nor his or her heirs are responsible for any shortfall if the balance of the loan is greater than the value of the home. Anyone inheriting the home receives the property subject to the reverse mortgage. An heir can allow the foreclosure, or if he or she wants the home they can either pay the balance due or 95% of the property’s appraised value, whichever is less. Let’s look at three examples that illustrate these rules.
We start with a simple example. An unmarried person dies with no family and a reverse mortgage on their property. The lender forecloses on the decedent’s property, and a court-appointed executor or administrator, in a probate process, oversees the sale of the house. If the house sells for more than the balance of the loan, the executor or administrator distributes any remainder to heirs or according to instructions in the decedent’s will. If the house sells for less than the amount of the loan, the lender must consider the shortfall a loss. The lender has no claim to any other property in the estate. This means the lender may not file a lien on a decedent’s financial accounts, vehicles, or other real property.
Let’s look at a more complicated example. Let’s say a homeowner dies with a reverse mortgage on their home. An heir (a child or spouse, for example) inherits the home through the probate process and wants to live in the home. The new owner inherits the property subject to the reverse mortgage. Let’s say the home has an appraised value of $250,000, and the loan balance is $50,000. The new owner must pay the lender $50,000. If he or she fails to do so, the lender will foreclose, sell the home, take $50,000 plus the costs of the foreclosure, and pay the heir whatever is left over. Or, let’s say the home appraises for $250,000 and the loan balance is $300,000. The heir has the right, if the loan is a HECM, to pay-off the loan for 95% of the appraised value. Here, the heir can retire the loan with a $237,500 payment ($250,000 appraised amount X 95% = $237,500), even though the loan balance exceeds the appraised value.
In our third example, two spouses qualify for a reverse mortgage. After they close the reverse mortgage one spouse dies. The other spouse can remain in the property and will continue to receive monthly reverse mortgage payments, assuming they elected to receive monthly payments, for as long as the loan is funded. When the second spouse dies, sells the house, or takes up residence elsewhere, the loan must be repaid.
|Homeowner Owns Home…|
|…Free & Clear||…With Conventional Mortgage||…With Reverse Mortgage|
|Upon Homeowner’s Death…||Ownership rights pass to heirs via probate process according to owner’s will or state law. If married, rights may pass to spouse or co-owner directly or via probate depending on the title. Or, if home is in a trust, the ownership rights will change according to the trust’s instructions. *|
|In the Probate Process…||Executor or administrator files deed to transfer home to heir(s), depending on will, and if property is subject to claims against the estate.||Ownership rights transferred to heir. Heir owns home subject to mortgage.||Ownership rights transferred to heir, subject to reverse mortgage.
1) Heir must pay balance due, i.e. refinance or pay 95% of appraised value.
In either event, estate not liable for reverse mortgage loan balance.
|Which Results In…||Heir owns property free & clear, unless property must be sold to satisfy debts. *|| 1) Joint borrower / co-owner (if any) may continue mortgage payments, or…
2) If not a joint borrower, heir must pay mortgage balance due upon title transfer.
|Depends on heir’s actions:
1) Allow lender to foreclose, or…
2) Repay loan balance i.e. refinance or pay lender 95% of appraised value, whichever’s less.
Should you wish to know more about Reverse Mortgages simply email or call Melanie Sedam at ReverseMortgage62AZ.com and she will mail you out a brochure about Reverse Mortgages and answer any questions you may have about a life without a mortgage payment.
Her contact information is below: