What happens when reverse mortgage borrower dies?

One sad but common way a reverse mortgage ends is when the last borrower on the loan passes away. When the loan ends in this way, it comes due and must be paid. There are multiple ways heirs can handle reverse mortgage loan repayment. But first, they need to decide what to do with the home.

Reverse mortgage repayment options for heirs

Heirs of a home equity conversion mortgage (HECM) borrower will not take on any personal debt to satisfy the loan balance. However, the estate will continue to accrue interest and fees until the loan is closed. To avoid unnecessary charges, heirs should contact the loan servicer as soon as possible to determine the outstanding balance on the mortgage.

Understanding Your Loan Terms: HECMs vs. Proprietary Reverse Mortgages

Home equity conversion mortgages (HECMs) are federally insured reverse mortgages that account for most reverse mortgages in the United States. HECMs are subject to oversight by the U.S. Department of Housing and Urban Development (HUD). Proprietary reverse mortgages are regulated by individual state governments. While many proprietary reverse mortgages have some or all the same terms as a HECM, they are not required to. If you have a proprietary reverse mortgage, make sure you understand the specific terms of your loan.

HECM heirs have four options for resolving the reverse mortgage balance:

Sell the home to repay the balance. The estate can sell the home and apply the proceeds to pay the loan in full.
Short Sale. Heirs may keep the house by paying the lesser of the mortgage balance or 95% of the property’s appraised value.
Sign over the title and complete a deed in lieu of foreclosure. Subject to the lender’s approval, heirs can sign the property title over to the lender accompanied by a deed in lieu of foreclosure. This satisfies the debt and prevents the foreclosure of the home.
Do nothing. If heirs choose to do nothing with the loan, the lender will foreclose on the home. HECMs are non-recourse, meaning heirs will not owe more than the value of the home even if the loan balance exceeds it. In other words, the heirs will not be personally liable for any deficiency if they decide to let the lender foreclose on a home that is underwater. Because of this non-recourse status, communicating with the lender about options, is a better course of action than doing nothing.

How quickly must heirs act?

Upon the death of the last borrower on a HECM, the lender will send a due and payable notice to the borrower’s address. Heirs have 30 days from the receipt of this notice to decide how they want to proceed. Subject to the HUD’s guidelines, lenders will typically offer six months to complete the transaction.

It is important for heirs to stay in contact with the lender and act as quickly as possible. Interest and fees will continue to accumulate until the loan is paid off.

Preparing heirs in advance

If circumstances permit, reverse mortgage borrowers should inform their heirs that they have taken a reverse mortgage. This type of conversation helps ensure that heirs understand the loan terms and their responsibilities at the loan’s conclusion.

While this type of conversation is advisable, whether you choose to have it depends on your relationship with your heirs. In other words, the decision to take a reverse mortgage is for the borrowers alone. You have no legal obligation to disclose private financial information to your heirs.

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This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For tax advice, please consult a tax professional. For more information about whether a reverse mortgage fits into your retirement strategy, you should consult your financial advisor.