How Does a Reverse Mortgage Work When You Die?
Reverse mortgages allow seniors to live in their homes without mortgage payments and can also provide much-needed cash. Paying back the loan can get complicated, depending on how much equity you have in your house and whether you want the house to stay in your family after your death.
If you’re a reverse mortgage borrower, it’s important to have a plan to deal with your loan after you die. Family members also need to understand their options for keeping the house, as well as their payment responsibilities.
How to pay back a reverse mortgage after death
A reverse mortgage must be paid off when the borrowers move out or die. A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage because it is backed by the Federal Housing Administration (FHA). Here are the options for paying off a reverse mortgage before or after the borrower’s death.
Sell the house and pay off the mortgage balance. Usually, borrowers or their heirs pay off the loan by selling the house securing the reverse mortgage. The proceeds from the sale of the house are used to pay off the mortgage. Borrowers (or their heirs) keep the remaining proceeds after the loan is paid off.
Sell the house for less than the mortgage balance. HECM borrowers who are underwater on their house can satisfy their loan by selling the house for 95% of its appraised value and using the difference to pay the HECM. Even though the sale may not cover the balance due on the loan, the Federal Housing Administration (FHA) doesn’t allow lenders to come after borrowers or their heirs for the difference. Borrowers with jumbo reverse mortgages need to check with their lender to see if they are liable to repay any difference after the home is sold.
Provide lender a deed in lieu of foreclosure. Many reverse mortgage borrowers die with reverse mortgage balances that are higher than the value of the home. When heirs inherit an underwater house, they may decide that the easiest option is to provide the lender with a deed instead of having to go through the time and cost of foreclosure. Choosing this option will not hurt your heir’s credit score. It’s also available to reverse mortgage borrowers who want to move, but providing a deed in lieu of foreclosure will hurt your credit score.
Have a child take out a new mortgage on the house after your death. An heir who wants to keep a house can either pay off the HECM or take out a new mortgage to cover the balance of the reverse mortgage. If the balance on the reverse mortgage is higher than the value of the home, heirs can buy the house for 95% of its appraised value.
Refinance to a forward mortgage. A borrower that wants to move out of a house but keep it as a rental property will need to find a way to pay off the reverse mortgage. To keep the property, borrowers may be able to use savings to pay off the reverse mortgage or refinance to a forward mortgage. Seniors refinancing to a forward mortgage will have to meet credit score, debt-to-income (DTI) ratio and down payment requirements.
Know the timeline for repayment or turning over the home. If you are the last surviving borrower on the loan, the loan must be paid within 30 days of the date of your death. If your estate or heirs plan to sell the home or obtain funding to pay off the loan and need more than 30 days, they may receive a 90-day extension from the lender by providing approved documentation of their efforts. If your spouse was not on the original reverse mortgage loan but wants to remain in the home for his or her lifetime, the lender may offer repayment options once certain requirements are met, including submitting any required documentation within 30 days of the borrower’s death.
How reverse mortgages affect spouses and partners
How a reverse mortgage affects spouses and partners depends on if they are listed as a co-borrower or not.
If your spouse or partner is a co-borrower
When you and your spouse are co-borrowers on a reverse mortgage, neither of you have to pay back the mortgage until you both move out or both die. Even if one spouse moves to a long-term care facility, the reverse mortgage doesn’t have to be repaid until the second spouse moves out or dies.
Because HECMs and other reverse mortgages don’t require repayment until both borrowers die or move out, the Consumer Financial Protection Bureau (CFPB) recommends that both spouses and long-term partners be co-borrowers on reverse mortgages.
If your spouse or partner isn’t a co-borrower
If your spouse is not a co-borrower on your reverse mortgage, then they may have to repay the loan as soon as you move or die. As for whether they can remain in your home without repaying, that depends on the timing of the HECM and the timing of your marriage.
If a reverse mortgage borrower took out an HECM before Aug. 4, 2014, then a non-borrowing spouse doesn’t have a guaranteed right to stay in the house. The lender may start foreclosure proceedings or permit the non-borrowing spouse to stay in the home through Mortgagee Optional (MOE) Assignment. Through this process, the non-borrowing spouse may stay in the house by certifying specific information each year. This information includes:
- Confirming the non-borrowing spouse was married to the borrower when the reverse mortgage was originated and upon the borrower’s death
- Verifying they do and have lived in the home as a primary residence
- Providing their Social Security number or Tax Identification Number
- Continuing to meet all loan obligations
- Ensuring the loan will not come due and payable
- Agreeing that they will no longer receive any payments from the loan
The rules are different for HECM loans that were issued after Aug. 4, 2014. With these loans, an eligible, non-borrowing spouse can stay in the home after the borrowing spouse moves out or dies, but only if they meet these criteria:
- They must have been married to the reverse mortgage borrower at the time the loan was issued.
- They must be named as a spouse in the HECM documents.
- They must live and have lived in the home as their primary residence when the reverse mortgage loan originated.
If you’re an eligible non-borrowing spouse, the reverse mortgage won’t need to be paid until you die or move out of the house.
How to create a payoff plan for a reverse mortgage
Your heirs should know your plan for paying off your loan after you die, and have the information and tools they need to execute your wishes.
Get a will
As part of your plan, make sure you have a will before taking out a reverse mortgage to ensure all your assets (including your house) are transferred to the correct person upon your death. Without a will, your house will go through a probate process and the state will decide who inherits your share of the house. A will is particularly important for reverse mortgage borrowers who have a spouse or long-term partner living with them.
Make sure your records are up to date
Under current tax laws, borrowers who use a reverse mortgage to buy or substantially improve their home may be eligible for a home interest tax deduction when the reverse mortgage is paid off. But the only way to prove whether the interest is deductible is to keep records that show exactly how you used funds from a reverse mortgage.