What happens to a reverse mortgage when the borrower dies?
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UPDATED: Dec 4, 2013
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When a reverse mortgage borrower dies, the outcome depends upon the existence of any remaining family members and whether they want to keep the home.
When the original homeowner passes, the process afterwards is similar to the process required with a regular mortgage loan, according to Heather Chubb, a life transitions lawyer at The Chubb Law Firm.
“You end up with the same estate administration issues as you would with any other piece of property,” she said.
Unlike a regular mortgage where a lender pays for the property and the borrower repays the debt each month, on a reverse mortgage loan, it is the homeowner who receives regular payments for their property.
The loans, originally called home equity conversion mortgages (HECMs), are available to homeowners 62-years-old and older. They allow homeowners to use their paid-off homes as equity to access money. Lenders approve the non-recourse loan with mortgage insurance, which protects the homeowner and heirs from ever owing more than the value of the home, according to Bill Parker, a CPA and senior loan officer at Gencor Mortgage.
“If the borrower dies and owes more than the home is worth, they can just turn the home over to the lender and owe nothing,” he said.
Leftover heirs or family members can proceed in one of the following ways:
- Repay the loan in full to keep the property
- Turn the home over to the lender who will sell the property
- Abandon the property
If the remaining family members want to keep the property, they will have to contact the lender and repay the amount that was paid out to the deceased borrower. Reverse mortgage payments become payable upon the borrower’s death and are usually required to be repaid within several months to a year after the borrower has passed, but may differ on a lender-by-lender basis.
Paying large amounts to the reverse mortgage lender can create problems for family members because most lack the funding to make this possible, Chubb said.
“No one can afford to buy the home,” she said. “Funding can be an issue for the family if they want to keep that home.”
If the home needs to be sold, other problems can arise. For reverse mortgages that were approved leading up to the housing crash, where lenders paid out more than the home is currently worth, many lenders now face issues that need to be resolved in short sales.
The final option for surviving heirs is to walk away. This choice is not recommended. Remaining family members should contact the reverse mortgage lender because if the home sells and there are remaining funds not paid out to the borrower, the money will transfer to the deceased person’s estate.
Before a borrower considers a reverse mortgage, there is one major factor that he or she should consider, according to Rick McInturff, a senior loan officer for Proficio Mortgage.
When a couple lives together in a home, both should place their names on the reverse mortgage. That way, if one partner dies, the other will remain protected.
“If both husband and wife are original loan holders and one of them passes away, nothing happens to the loan, all terms stay the same, all monies remain if available,” McInturff said.
But if the loan is placed in only one partner’s name and that partner dies, the other will have to repay the debt or vacate the property.
Parker said that reverse mortgages have a bad reputation but it’s simply because most financial experts are inexperienced with their intricacies. He said the mortgages have built-in financial planning aspects to them.
“They are designed to be used as a line or credit over time to meet expenses as needed,” he explained.
Borrowers decide how they will receive their money, what size their payouts will be, and how often they will get paid, such as every 10 years or over the entire course of their life in the home.
Although the process after a death can be complicated, reverse mortgages can be a positive option for older consumers to eliminate their mortgage payments, make housing repairs, cover medical expenses, or use as a secondary form of income.