What happens to a reverse mortgage when you die?

If you don't have enough retirement income to meet your living expenses, you can use a reverse mortgage to tap into the accumulated equity in your home. If you meet the terms of the reverse mortgage, you can receive a lump sum payment, monthly payments, or a line of credit. But, have you considered what will happen to the reverse mortgage when you die?

If you die and you have an existing reverse mortgage, the loan balance must be repaid in full unless an eligible co-borrower retains ownership of the home and meets the terms of the loan. If there is no eligible co-borrower, the heirs can choose to sell the home and use sale proceeds to pay the loan balance, take out a new mortgage to keep the property or provide a deed in lieu of foreclosure.

What is a reverse mortgage?

A reverse mortgage is a type of mortgage available to senior homeowners aged 62 or older. It allows homeowners to tap into their home equity while retaining ownership of their homes.

Unlike traditional mortgages where borrowers make monthly payments to the lender, in a reverse mortgage, the lender makes payments to the homeowner. You can receive payments either as a lump sum, periodic payments, or a line of credit similar to an access bond. The loan will fall due when you sell the home, move out permanently, or pass away.

Obligations of a reverse mortgage while you are alive

Reverse mortgage borrowers are required to meet several obligations. First, they must continue to live in the home as their primary residence. Moving out for an extended period (over 12 months vacant) or permanently will trigger repayment requirements.

Additionally, homeowners are required to maintain the property in good condition and ensure property taxes and homeowner insurance are up to date. If the home requires any repairs or replacements, the homeowner must ensure necessary repairs and fixes are done.

What happens to a reverse mortgage when you die?

Reverse mortgages only become due and payable when the last remaining borrower on the loan passes away, sells the home, or no longer uses it as their primary residence. At this point, the borrower's estate or heirs must repay the reverse mortgage balance.

When you die, your executor or heirs should immediately notify the reverse mortgage servicer of your passing. The servicer will then relay this information to the executor, including all the details on the repayment process and timelines.

Most heirs choose to sell the home to repay the reverse mortgage. If the home is sold for an amount greater than the loan balance, the ’profit’ will become part of the deceased’s estate and it will be available for distribution to the heirs. The mortgage lender will only take what is due on the loan plus the accumulated interest.

What happens if one spouse dies with a reverse mortgage?

If a married couple takes out a reverse mortgage and one spouse passes away, the surviving spouse can continue to live in the home and receive the reverse mortgage payments.

However, there are certain conditions that the surviving spouse must meet to continue receiving reverse mortgage payments. The spouse must have been listed as a co-borrower on the reverse mortgage agreement and must continue occupying the property as their primary residence. Additionally, the surviving spouse will be responsible for maintaining the property in good condition and paying property taxes and homeowner insurance.

If the surviving spouse was not listed as a co-borrower on the reverse mortgage agreement, and the loan was taken after August 2014, they are still entitled to some protections as an ‘Eligible Non-Borrowing Spouse’. These protections allow eligible surviving spouses to remain in the home and continue receiving reverse mortgage benefits even after the death of the spouse. However, the surviving spouse must abide by the loan terms and requirements, and be over the age of 62 at the time of the borrower’s passing.

Options when you inherit a reverse mortgage

When a homeowner dies, the heirs of the deceased’s estate may have several options to deal with the unpaid reverse mortgage.

Here are the options they have:

Keep the home

If your heirs wish to keep the home, they can do so by repaying the reverse mortgage loan balance. This could be from personal funds or by acquiring a new mortgage or loan to ‘buy out’ the amount due.

Sell the home

Your heirs have the option to sell the home and use the proceeds from the sale to repay the reverse mortgage. Any remaining money from the sale goes towards your estate and will be distributed according to your will.

Purchase the home at the appraised value

If the loan balance is more than the value of the home, the lender won’t necessarily require the extra funds to be paid. Your heirs have the option to buy the home from the lender at (at least) 95% of its appraised market value, even if it is less than the outstanding loan balance. This allows them to keep the home without having to repay the full loan amount.

Deed in Lieu of Foreclosure

In certain situations, heirs may opt for a "deed in lieu of foreclosure," which involves conveying the property back to the lender. This can be a quicker and less costly way to pay off the reverse mortgage, but not all lenders are open to it.

However, the specific terms and conditions of the reverse mortgage, including its repayment, can vary depending on the actual agreement you sign with the lender and applicable regulations in your state. So make sure to plan carefully for this part of closing a reverse mortgage as part of your wider estate planning, so your loved ones don’t have to fight legal battles as they grieve your loss.