Reverse mortgages are intended to enhance the lives of homeowners 62 years and over by enabling them to continue residing in their homes without the burdens of monthly payments. However, there are a number of common misconceptions regarding what happens in a reverse mortgage when the borrowers pass away.
First and foremost, the bank does not take your home. Borrowers in a reverse mortgage are not selling their home or giving up any rights of ownership. The borrower’s name/names remain on the title; meaning they are still responsible for paying basic homeowner fees such as insurance, real estate taxes, and other maintenance costs. Additionally, the borrower retains the rights to make decisions regarding their home.
It is also important to note that once the loan closes, the terms will not change. Because certain features of a reverse mortgage are dependent on the age of the youngest borrower, people commonly fear the repercussions that may occur if the younger borrower predeceases the elder. However, there is no reason for worry come these circumstances; the terms of the reverse mortgage remain unchanged regardless of the ages of the remaining borrower.
Borrowers and their heirs involved in a reverse mortgage should also be aware of the reverse mortgage feature known as non-recourse. This feature ensures that neither the borrower nor the heir will end up owing more than the value of the home upon maturity. For this reason, borrower’s do not have to worry about leaving any debts for their heirs to pay off.
A reverse mortgage must be paid off when the last original borrower moves out or passes away. As previously mentioned, borrowers in a reverse mortgage maintain full control of their home. Subsequently, if they do not plan on selling the home and paying off the mortgage during their lifetime, they are responsible for making decisions regarding what will happen to their property when they die.
Borrower’s and their heirs have a number of options to consider when it comes to paying off a reverse mortgage. Heirs have 30 days following the death of the borrower to decide how they will move forward. For this reason, it is important for the borrower and their heir to evaluate these options carefully and make a plan to ensure a smooth transition to pay off.
If the heir wishes to keep the home, the Federal Housing Administration (FHA) typically only allows 6 months to pay off the remaining balance on the reverse mortgage. The balance of the reverse mortgage will continue to increase over these 6 months. Thus, it is crucial for the heir to apply for a new mortgage or pay off the remaining balance immediately following the death of the borrower. Under a reverse mortgage, the heirs are responsible for repaying the lesser of the home value or 95% of its appraised value.
If the heir does not wish to keep the home, they can sell the home and use the revenue to pay off the reverse mortgage balance. If the sales revenue exceeds the balance due, the heirs keep these remaining proceeds after pay off. On the other hand, if the HECM balance due exceeds the sales revenue, the loan can be satisfied by selling the house for 95% of the appraised value. In cases like this, the FHA protects heirs from lenders and credit blunders. In a jumbo reverse, the heir is not protected by the FHA and must check with the lender in regards to any difference due after the home is sold.
If the heir inherits a home that they do not wish to keep or sell, they also have the options to provide the lender with a deed in place of foreclosure or simply walk away and leave the lender to dispose of the property. Heirs may choose one of these routes as an easier alternative when they want nothing to do with the home after the death of the borrower. This option will have no negative impact on the heir’s credit score
• In order for the heir to make these decisions and pay off the reverse mortgage with ease, the borrower must make sure the heir’s name is on the title and they have access to their reverse mortgage statement.
• Borrowers should have a will which clearly transfers the home to the correct heir upon death. The absence of a will results in a probate process during which the state is granted the rights to determine inheritance.
• If the borrower intends to leave substantial inheritance for their heirs, they should be aware of the accumulating interest on the money actually borrowed in a reverse mortgage. Consequently, borrowing less or borrowing in small amounts will result in less interest accrued and a lower pay off balance.