Reverse mortgages are a great option for seniors who need cash for home renovations, medical bills, or to live out their retirements comfortably.
Reverse mortgages only need to be paid once a homeowner stops living in their home. For some, this comes when it’s time to move, but many seniors make plans for their heirs to take over the reverse mortgage in their wills, too.
But how does a reverse mortgage work if you die? Today, we’ll work through what happens so you or your heirs can be prepared for the future.
What Is a Reverse Mortgage?
A reverse mortgage is a loan exclusively available to seniors over 62 who want to use their built-up home equity. To be eligible, you must own at least 50% of your home and it must also be your primary residence (meaning you live there for most of the year).
Reverse mortgages let seniors get access to funds without having to worry about immediate repayment. But when you leave the home, the reverse mortgage reaches maturity and must be repaid. That process can become tricky when someone passes away and leaves an heir in charge of their estate.
If the Borrower Dies, What Happens to the House?
So here’s the question: how does a reverse mortgage work if you die?
When a homeowner passes away, the responsibility of the house will pass to whoever is indicated in a will. If someone passes away without a will, the property will be bequeathed to direct descendants or close family members.
The heir will then be in charge of paying for the reverse mortgage. There are several options for handling settling the loan.
If there is still money owed for the loan, the borrower can still leave the house to their heirs. If you have a reverse mortgage and pass away, just as you still owned your home, your heir can own the home after your death. But they will need to take care of the loan balance.
How to Pay Off the Loan Balance
One frequent question homeowners ask us is: how does a reverse mortgage work if you die and your heir isn’t immediately able to pay off the loan balance?
There are a few different options depending on what the heir(s) want to do with the house. Let’s examine the routes available.
Selling the House
One of the most common ways to settle a reverse mortgage is by selling the house in question. If the heir cannot pay off the loan personally, this is the easiest way to satisfy the terms of the loan.
After the borrower has died, the house will need an appraisal by an expert sent by the loan service provider. They will determine the market value for the home. This assessment can result in two possibilities:
- The home is worth more than the loan balance.
- The house has depreciated. The house’s value is lower than the loan balance.
If you find yourself in the first scenario, you can sell the house and walk away with any money left over from the sale after settling the loan.
However, if the house has fallen in value, don’t despair!
Most reverse mortgages are non-recourse loans. With this provision, no matter how much interest has accrued over time, you will never owe more than the house is worth. Its worth is contingent upon the value of the property estimated for when the loan is due for repayment, not at the time of receiving it.
What does that look like for you as an heir? It means you don’t need to worry about any considerable amount of interest hanging over your head. Simply selling the house will satisfy the repayment terms.
Keeping the House
If the heir wants to keep the house, they will need to pay off the full loan.
An appraiser will determine the home’s market value. You will not owe any more than its market value. You will only owe the total loan balance if it is less than the value of the house.
Handing Over the Keys
While selling the house would settle a reverse mortgage, it may be an unnecessary hassle for the borrower’s heir. It may just be easier to hand over the keys to the lender.
Consider this if:
- The house is worth less than the loan balance.
- The heir has no interest in keeping the house and paying the balance.
- There is no hope of recovering equity from the sale.
If this is your situation, you may not want to deal with the inconvenience of selling the house. With a “deed in lieu of foreclosure,” the lender will recover the house, and the debt will count as settled.
When the Loan Repayment Is Due
When your loan reaches maturity, it’s time to pay off the balance. You can trigger maturity with a reverse mortgage through selling the home or the death of the borrower.
This situation is why heirs must be aware of any reverse mortgages. As soon as the maturity event occurs, the repayment time will come due.
Heirs should get in touch with the loan provider as soon as possible to discuss payment options. Communication is vital for paying off a loan like this tied to a house. A provider can foreclose within thirty days to six months from the date of the loan.
Extensions can be possible. However, these will not be on the table unless the heir communicates with the service provider. These extensions may also require the correct documentation. Such situations would apply if you were arranging the sale of the house or the financials of paying the balance.
Need Some Help with Your Reverse Mortgage?
Preparing to handle a reverse mortgage after the death of the borrower can be intimidating. But it doesn’t have to be!
Hopefully, we’ve answered your questions about reverse mortgages work when a homeowner passes. For more information about reverse mortgages, including qualifying for one, contact our team. Our passion is helping seniors live out their retirement in financial comfort!