Are Heirs Responsible for Reverse Mortgage Debt?

Feb 6, 2019 | Reverse Mortgages

 
KEY TAKEAWAYS
  • Reverse mortgages mature after a maturation event, such as the death or departure of the borrower from the home. 
  • Reverse mortgage lenders do not own the home once the loan becomes payable. 
  • That means surviving heirs or inhabitants of the house are entitled to pay off the loan if they wish to keep or remain in the home. 
  • Heirs must have the home appraised within 60 days of the maturation event. 
  • They must also decide whether they will stay in the home. After 6 months, the lender may foreclose on the home to collect on the debt. 
  • Heirs may delay for three months twice, meaning they have up to a year to pay directly or sell the home to satisfy the debt.

As you may already know, a reverse mortgage—otherwise known as a HECM loan—allows seniors to receive extra income by converting the equity in their home into usable cash. The borrower must first meet a series of qualifications such as owning a considerable percentage of a home that serves as his or her primary residence and must be at least 62 years of age. The loan only becomes due when there is a maturity event: a borrower passes away, sells the house, or no longer lives in the property.

So, what happens to reverse mortgage heirs when the borrower passes away and the loan matures? Reverse mortgage heirs’ responsibility for a HECM loan depends on a few factors. There is a timeline within which heirs must make decisions regarding the estate and may either repay the loan balance, sell the home, or deed the home to the lender to satisfy the obligation of the mortgage.

Below are the responsibilities for heirs of a home with a reverse mortgage when the loan becomes due. Navigate directly to the section relevant to you or simply continue reading for a comprehensive overview of reverse mortgage information for heirs.

When does a reverse mortgage loan mature?

With a regular mortgage, a borrower pays off the loan, month by month, and gains equity in the home with each payment. In a reverse mortgage, however, a borrower converts the equity in their home into cash. The proceeds from a reverse mortgage act as extra income for seniors who may need to pay for medical expenses or if they want to delay taking out Social Security benefits. No other payments need to be made besides property taxes, maintenance fees, and insurance payments.

Wondering how a reverse mortgage works when repayment is due?

A reverse mortgage or HECM loan will mature and become payable if the borrower fails to keep up with property taxes, repairs, and maintenance. If the borrower permanently moves out of the home or passes away, the loan will also be due. When the loan is considered payable due to the borrower’s death, heirs will need to contact the lender to decide their course of action in regards to the estate.

What happens to the reverse mortgage when the owner dies?

The loan is considered payable and due when a borrower passes away. In a reverse mortgage, the lender does not own the property so the lending institution may not sell the house on notification the borrower has died or the last eligible non-borrower spouse has passed away. The borrower will always retain the title to the home. With that said, heirs will need to decide how they would like to proceed with the estate within a set time period.

If there is a non-borrower who is living in the home who is not a spouse approved to remain in the home when the borrower passes away or moves away, the loan is still due. In this case, other occupants may need to make arrangements for another living situation. Find out more about reverse mortgages by clicking the link below.

Are heirs responsible for reverse mortgage debt?

No, reverse mortgage heirs do not have to take on the remainder of the loan balance and are not held responsible for paying back the loan.

If the loan balance is more than the appraised value of the home, heirs will not have to pay the difference. This is because a reverse mortgage is known as a non-recourse loan. Instead, the Federal Housing Administration insurance absorbs that extra cost. The borrower pays into this federal insurance fund during the closing process of the loan as well as each month.

Reverse Mortgage Steps for Heirs

30 days

Lenders keep tabs on databases to track death certificates. Within 30 days of getting a notice of death of the borrower, the lender sends a Due and Payable notice to the estate. The notice contains information for how heirs may proceed:

  • Satisfy the remaining loan balance of the HECM
  • Sell the property for at least 95% of the appraised value
  • Provide lender with Deed-in-Lieu of foreclosure

Along with this information on the reverse loan, the lender will also send over a list of eligibility requirements for a deferral period.

60 days

Heirs are required to get an appraisal of the home no later than 30 days after the due and payable notice is sent. If there is a surviving, non-borrowing spouse, he or she may apply for a deferral if requirements outlined by HUD are met.

2-6 months

Within this time frame, heirs must choose whether or not they want to sell the house to satisfy the HECM loan. Remember: the loan will continue to accrue interest during this time.

6 months

Within six months of the borrower passing way, a lender can start the foreclosure process to satisfy the loan if no actions to repay the HECM are taken.

12 months

Heirs may be eligible to receive two three-month extensions to pay the reverse mortgage balance subject to HUD approval. This gives heirs up to a full year from the death of the borrower to repay the loan balance or sell the home.

Getting Started with Reverse Mortgages

If you’re looking to get started with a reverse mortgage, these articles can help guide you through all aspects of the process.

Guide to HECM Loan                                      Reverse Mortgage Limits

Non-Borrowing Spouse Protections              Jumbo Reverse Mortgages

Reverse Mortgage Taxes                                Reverse Mortgages and Heirs

Reverse Mortgage Heir Options

As an heir of a reverse mortgage, you will have 30 days to decide your actions upon the receipt of a “Due and Payable” notice and 3 to 12 months to pay off the loan balance. Some lenders offer up to six months to determine financing, but terms and conditions vary.

Remember: A reverse mortgage heir’s responsibility includes contacting the HECM lender as soon as possible to figure out the next steps. In addition, it’s a good idea to talk to any family members who have reverse mortgages to discuss options ahead of time.

Retain the home: In order to keep the home, heirs of a reverse mortgage are required to pay the full loan amount, but never more than 95% of the property’s appraised value. You will also owe payment for any associated fees and interest accrued.

  • Refinance: Reverse mortgage heirs typically cannot refinance a HECM loan. You may have to find a special lender or financial institution to refinance because many conventional lenders will not provide a loan to someone whose name is not the name on the title of the home. Refinancing a reverse mortgage typically can only occur by the homeowner who originally applied for the reverse mortgage.

Sell the home: If the home is worth more than the loan amount, heirs can sell the home, pay off the loan balance, and take whatever is left from the sale as an inheritance.

Short sale: Heirs may sell 95% of a home’s appraised value in a short sale to repay a HECM. However, heirs may need FHA appraisal of the home before a short sale is approved.

Allow foreclosure: Heirs are not held responsible for a reverse mortgage loan and can walk away from the property without owing anything. As mentioned earlier, if the home is worth less than the loan amount, that is the lender’s responsibility and why a borrower pays into a federal insurance fund.

Deed-in-Lieu of Foreclosure: By signing this document, heirs legally give the title of the property over to the lender. At this point, the home will go into foreclosure. The property is then used to repay the loan.

Note: Heirs of a reverse mortgage borrower should contact the lender to formally discuss repayment. The heirs must choose between selling the home, walking away, or pursuing financing to keep the property. If the reverse mortgage loan won’t be repaid by a home sale, foreclosure proceedings may be pursued.

Foreclosure on a mortgagor’s home doesn’t negatively impact heirs’ credit reports or have other financial repercussions because it’s considered voluntary.

Reverse Mortgage Heirs’ Responsibility

When a loved one with a reverse mortgage passes away, heirs have several options they can pursue in regard to the fate of the home. Heirs may choose to keep the property by arranging financing to settle the HECM loan. They may also sell the home and keep any remaining proceeds from the sale that don’t go toward the reverse mortgage loan repayment.

Alternatively, heirs may choose to walk away without any negative effect on their credit histories or sign a Deed-in-Lieu of Foreclosure to satisfy the loan. In order to process a reverse mortgage loan after it becomes due, it is important for heirs to act quickly and be informed of their choices.

If your parent or a loved one wants to start the reverse mortgage application process, our loan experts are standing by to assist you and answer questions you may have about the servicing of the loan or any maturity event that causes the loan to become payable.

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