When the last borrower on a reverse mortgage passes away, the loan comes due and must be paid back. Heirs can handle reverse mortgage loan repayment in multiple ways, but first, they need to decide what to do with the home.
Options Heirs Have for Repaying a Reverse Mortgage
Heirs will not take on any personal debt to satisfy the loan balance. There are four options available to heirs when deciding how to repay the reverse mortgage.
- Sell the home. If the heirs want to repay the loan, they can use the proceeds from the sale of the house and apply this to the outstanding balance.
- Keep the home. The heirs can keep the house if they pay the mortgage balance or 95% of the property’s appraised value, whichever is less. Heirs will receive any funds that exceed the loan balance.
- Sign over the title and complete a deed in lieu of foreclosure. The heirs can give the property to the lender by signing over the home’s title to the lender accompanied by a deed in lieu of foreclosure. By doing so, the debt is satisfied, and it will prevent foreclosure of the home.
- Do nothing. If heirs choose to do nothing with the loan, the lender will foreclose on the home.
Heirs should contact the loan servicer as soon as possible to determine the outstanding balance on the mortgage. Interest continues to accrue after the borrower’s passing, so delaying a decision can be expensive.
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How Quickly Do Heirs Need to Act?
Upon the death of the last borrower on a reverse mortgage, a 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. Typically, lenders will 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. Acting quickly will limit the amount paid.
Preparing Heirs in Advance
If circumstances permit, it is a good idea for reverse mortgage borrowers to let their heirs know that they have taken a reverse mortgage. This type of conversation helps ensure heirs understand the loan terms.
This will be the first time many heirs have heard of a reverse mortgage. The borrower may need to explain how this loan differs from a traditional home loan. This conversation can be an excellent time to help heirs decide how they will eventually handle the loan so they are prepared and know what to do when and if the time comes.
While this type of conversation is advisable, it depends on your relationship with your heirs and your discretion. In other words, the decision to take a reverse mortgage is for the borrowers alone. There is no legal obligation to disclose private financial information to heirs.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. 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.
