The misconception that heirs inherit reverse mortgage debt may prevent potential borrowers from utilizing this valuable financial tool. What most don’t realize is that neither the heirs nor the estate is responsible for the debt in the event of the borrower’s passing. After the borrower of a reverse mortgage passes away, the lender does not automatically take ownership of the home or have the right to sell the property. The heirs or the estate will inherit the home, and once the loan is repaid, they will receive any remaining equity.
What Happens to The House After a Reverse Mortgage Borrower Dies?
When the borrower of a home equity conversion mortgage (HECM) passes away, the lender will send a due and payable notice to the estate and heirs, as applicable. This notice generally states how an heir can deal with the property, which includes:
- Selling the property for at least 95% of its appraised value
- Providing the lender with deed in lieu of foreclosure
- Providing payment for the loan balance of the HECM
The lender will order an appraisal if the home’s value isn’t likely to cover the loan amount. Heirs have 90 days after the borrower’s death to let the lender know if they plan to sell the home. They may be eligible for two 90-day extensions, but these need to be approved by the Federal Housing Administration. The request must also be supported by evidence that the heirs are actively working to sell the home. The National Reverse Mortgage Lenders Association provides a helpful guide about what to do when a reverse mortgage loan becomes due.
It’s important to note that interest, fees, and mortgage insurance premiums will continue to accrue during this extension window. The lender can initiate foreclosure at 90 days of the borrower passing away if there is no response to the initial “due and payable” letter from the heirs or if no extension has been requested.
Are Heirs Responsible for Reverse Mortgage Debt?
While heirs or a borrower’s estate technically inherit the property a loved one leaves to them, they have no personal responsibility for their family member’s loan debt. They may also walk away from the property without any negative effect on their credit histories. However, the inheriting heirs are responsible for paying property charges like taxes and insurance until a deed in lieu of foreclosure is signed.
An heir or estate should contact their loan servicer as soon as possible after the borrower’s death to decide on the next steps. Loan servicers audit death records daily. There is no advantage to delaying notifying the servicer since the timeline starts at the borrower’s death, not at the time of notification.
What Is a Non-Recourse Loan?
A reverse mortgage is a non-recourse loan. A non-recourse loan is a type of loan that allows the lender to seek repayment only from the sale of the home. A surviving spouse, heirs, or an estate cannot be charged if the loan balance is greater than the home’s market value. If the loan balance is less than the home’s market value when sold, the additional equity is retained by the heirs.
This means that if the loan amount exceeds the home’s value upon the borrower’s death, the lender cannot go after the estate or the heirs’ assets for the difference. The estate will never owe more than the value of the property. The difference is covered by federal mortgage insurance, which the borrower pays while holding this type of loan. Any leftover equity goes to the estate once the reverse mortgage loan is repaid.
Can Heirs Keep the House?
Heirs always have the option to keep the house of a loved one who had a reverse mortgage. They can pay off the loan or perhaps even apply for their own reverse mortgage if they qualify. But the choice is theirs, and they never inherit debt.
Given the complexities of real estate, it’s always a good idea to consult with a financial advisor before making a decision.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.