This question is important to many homeowners who have, or are considering, a reverse mortgage, as well as to their heirs. Nothing in this general information should be construed as legal advice. I am not an attorney.
This article refers only to the Home Equity Conversion Mortgage (HECM), the reverse mortgage program authorized by Congress, regulated by the U.S. Department of Housing and Urban Development (HUD), and insured by the Federal Housing Administration (FHA). HECM is the most common federally insured reverse mortgage program. Other types of reverse mortgages, including proprietary loans, may have different terms and conditions. Review your loan documents and consult a qualified professional to determine which type of loan you have.
The HECM program was created to help eligible older homeowners. The borrower owns the property, while the lender has rights under the mortgage, as with other types of mortgages. Neither the lender nor the government becomes the owner of the property simply because there is a reverse mortgage.
As a senior with a HECM reverse mortgage on my home and a reverse mortgage loan originator since 2005, I can attest that these loans have helped many thousands of seniors. For many—including me—they have been a blessing.
When the last borrower passes away
When the last borrower dies, a HECM generally becomes due and payable under the terms of the loan. The estate should notify the loan servicer as soon as possible and ask for written instructions.
The servicer will typically send a notice explaining that the loan is due and payable and outlining the available options and applicable deadlines.
Do not assume that every estate has exactly 30 days to respond or that foreclosure automatically begins if there is no response within that period. Read the notice carefully, respond promptly, and ask the servicer to clarify anything you do not understand.
HUD rules may allow additional time to repay the loan, sell the property, or pursue another permitted option. Extensions and deadlines depend on the circumstances and applicable requirements; an extension should not be assumed to be automatic. The estate should stay in contact with the servicer and document its efforts, such as listing the property for sale or seeking refinancing. If the estate does not cooperate or meet applicable requirements, foreclosure proceedings may begin sooner.
Any scheduled loan advances to the last borrower generally stop, and unused funds in a line of credit are generally no longer available. Confirm the details with the loan servicer.
Interest, mortgage insurance premiums, and any applicable servicing fees may continue to accrue until the loan is paid off. Property taxes, homeowners insurance, and other required charges must also be kept current, and the property must be maintained as required by the loan documents. Failure to meet these obligations may put the loan and the property at risk. Ask a tax professional whether any interest or charges may be deductible; tax treatment depends on the circumstances and applicable tax rules.
The HECM “non-recourse” feature
A HECM is generally a non-recourse loan. In broad terms, the borrower or the estate should not be liable for a loan deficiency beyond the home’s value, provided applicable requirements and procedures are followed. The rules governing repayment and the available options can depend on the circumstances and the loan documents, so the estate should confirm them with the servicer.
FHA mortgage insurance helps cover losses to the program when the loan balance exceeds the amount recovered from the property. Options for resolving the loan may include selling the property, paying off or refinancing the loan, or—in certain circumstances—using a deed in lieu of foreclosure. Consult the servicer and a qualified professional before choosing an option.
Examples
Example 1: The home is worth more than the loan balance
The HECM’s non-recourse protection may limit the estate’s liability for the shortfall, subject to applicable requirements and procedures.
The amount owed depends on several factors, including how long the loan has been outstanding, how much has been advanced, the payment plan selected, the interest rate, and applicable charges.
Changes in the home’s value do not directly change the loan balance, but they do affect whether the balance is greater or less than the home’s value.
HUD/FHA rules may allow the heirs or estate to keep the property by paying the lesser of the loan balance or 95% of the appraised value, subject to applicable requirements. Different requirements may apply if the property is sold to an unrelated buyer. Confirm the procedure and amounts with the servicer before setting a sale price or accepting an offer.
Spousal rights and other occupants
Surviving borrower spouse: If the surviving spouse is also a borrower under the loan documents, the death of the other borrower does not necessarily make the loan due and payable. The surviving borrower should notify the servicer and follow its instructions. Updating property ownership records may also be necessary.
Surviving non-borrowing spouse: A surviving spouse who is not a borrower may have rights or options that depend on several factors, including the loan’s closing date, the spouse’s eligibility status, occupancy, and compliance with applicable requirements. HUD rules changed in 2014, but the closing date alone does not determine a spouse’s rights. Review the loan documents and consult the servicer and a qualified attorney.
Other occupants: A person living in the home who is not a borrower or otherwise protected may eventually have to leave when the loan becomes due.
Tenants: may have rights under state or local law and may need legal advice.
I have tried to simplify the process to make it easier to understand. I sincerely hope this information is helpful. It is not legal advice, and I am not an attorney. Anyone with questions about their specific rights or options should consult a qualified attorney or other appropriate professional.