What Happens to a Reverse Mortgage If You Die?

A reverse mortgage is a loan allowing homeowners 62 years and beyond to convert part of their home equity into cash without having to sell their homes or make monthly mortgage payments. People commonly think lenders automatically get the home when the borrower dies or are concerned about the heirs’ obligations.

However, protections are in place, particularly related to the Federal Housing Administration-insured Home Equity Conversion Mortgage (HECM) program. Understanding the history and framework of reverse mortgages, including the protections and obligations under the HECM program, is crucial.

What happens to a reverse mortgage if you die?

Individuals may wonder what happens to a reverse mortgage if the borrower dies because it affects the heirs and estate’s handling of the property and loan repayment. 

This is a common question that arises from concerns about the heirs’ obligations and potential misconceptions that the bank will automatically take over possession of the home upon the borrower’s death.

What happens to a reverse mortgage after the borrower’s death hinges on several factors, including marital status, the presence of a co-borrower, the date the mortgage was taken out, and whether there are heirs. 

Situation	Immediate outcome	Options for heirs or estate
Single borrower	Loan becomes due	Sell home, repay or refinance loan, or deed-in-lieu of foreclosure
Married, with spouse as a co-borrower	Loan continues for the co-borrower	Not applicable
Married, without spouse as a co-borrower	Spouse may continue living in the home under specific conditions based on the loan origination date	Apply for deferral, sell the home, repay or refinance the loan, or deed-in-lieu of foreclosure

Marital and co-borrower status

The implications of a reverse mortgage upon the borrower’s death are significantly influenced by marital status and the presence of a co-borrower. Here’s a deeper look into each situation:

Single borrower

If the borrower is single and has no co-borrower, the reverse mortgage becomes due upon the borrower’s death. The heirs are often given a grace period, usually up to six months, with the possibility of extensions, to arrange repayment. 

This loan repayment can be managed through the sale of the home, refinancing, or other financial means.

Married with spouse as co-borrower 

When both spouses are co-borrowers on a reverse mortgage, the surviving spouse can continue living in the home, and the reverse mortgage terms remain unchanged. As long as one co-borrower remains in the home, there’s no immediate obligation to repay the loan.

Married without spouse as co-borrower

In cases where the spouse is not listed as a co-borrower, they may still be able to remain in the home under certain conditions. 

When a reverse mortgage borrower dies and leaves behind a spouse who isn’t a co-borrower, the surviving spouse’s ability to remain in the home without immediately repaying the loan depends on several conditions. 

These conditions are designed to protect the spouse from displacement while also meeting the requirements of the reverse mortgage lender and federal regulations. While the specific criteria may vary based on the lender and the reverse mortgage program, they generally include:

• Proof of marriage: The surviving spouse may need to provide documentation proving their marriage to the deceased borrower at the time of loan origination and until the borrower’s death.
• Occupancy: The spouse must demonstrate that the home was their primary residence at the time of the borrower’s death and that they continue to live there.
• Timely payments: It’s crucial that all property charges, such as property taxes, homeowner’s insurance, and maintenance expenses, are kept current to avoid default.
• Legal rights: The spouse may need to show legal entitlement to remain in the home, which could involve presenting the home’s title, deed, or other legal documents.

Regulatory changes introduced on August 4, 2014, significantly impacted these conditions, offering more protections to the surviving spouse. The conditions vary depending on when the reverse mortgage was originated.

Reverse mortgage origination date

Before the August 4, 2014 changes, spouses not listed as co-borrowers faced more significant risks, including the possibility of losing their home upon the borrower’s death. However, these conditions and the subsequent regulatory changes aimed to provide additional safeguards.

These changes aimed to address the issue of non-borrowing spouses potentially losing their homes upon the death of the borrowing spouse. 

The HECM program sought a more secure financial environment for surviving spouses by allowing for a deferral period and setting clear eligibility and maintenance requirements.

Here’s a summary of some of the critical changes:

Deferral period for non-borrowing spouses 

One of the most critical changes allowed non-borrowing spouses to remain in the home under a deferral period if the borrowing spouse passed away. 

This was contingent upon meeting specific conditions designed to ensure the spouse could continue living in the home without facing immediate foreclosure.

Eligibility requirements for the deferral period 

To qualify for the deferral period, non-borrowing spouses had to be married to the borrowing spouse at the time of loan closing and remain married until the borrower’s death. The home must also be the primary residence of the non-borrowing spouse.

Obligations during the deferral period 

Non-borrowing spouses were required to maintain the property and keep up with property-related charges, such as property taxes and homeowners’ insurance, to remain eligible for the deferral period.

How are ongoing obligations on a reverse mortgage handled if you die? 

Upon the death of a reverse mortgage borrower, the responsibility for ongoing obligations related to the property doesn’t automatically end. Heirs or the estate must continue to handle these duties to avoid the risk of foreclosure on the home, just like the borrower did.

These obligations typically include:

• Homeowners insurance: It is critical to keep the home insured against damages. The insurance protects the property, which is the collateral for the reverse mortgage loan. Failure to maintain adequate homeowners insurance can lead to more expensive lender-force-placed insurance.
• Property taxes: Property taxes must continue to be paid promptly. Unpaid taxes can result in tax liens against the property or the decedent’s estate, which could trigger a default on the reverse mortgage loan.
• Maintenance and repairs: Ongoing maintenance and necessary repairs must be carried out to ensure the property remains well-maintained and retains its value. Neglecting maintenance can decrease the home’s value and violate the reverse mortgage terms.

Whether the heirs choose to sell the home, pay off the reverse mortgage to keep the property or explore other options, maintaining the property’s insurance, tax payments, and the condition is essential during this transition period.

What options do my heirs have if they inherit a reverse mortgage?

Heirs inheriting a property with a reverse mortgage have several options to resolve the situation. They include:

• Refinancing the mortgage
• Selling the home
• Paying off the mortgage
• Opting for a deed-in-lieu of foreclosure

These options offer flexibility depending on the heirs’ financial situation, desire to keep the property, and the property’s value relative to the reverse mortgage balance.

Each option has its considerations and requirements, so heirs must consult with financial advisors or legal professionals to fully understand the implications and make an informed decision.

Refinance the reverse mortgage

If heirs wish to keep the property, they can refinance the reverse mortgage balance into a traditional mortgage or another loan type. This involves taking out a new loan to repay the reverse mortgage balance. 

Refinancing may be a viable option if the heirs qualify for a new loan based on their creditworthiness and income and desire to retain ownership of the property.

Sell the home

Selling the home is often the most straightforward solution. If the property’s sale price covers the reverse mortgage balance, the heirs can use the proceeds to repay the loan. Any remaining equity after the mortgage is repaid belongs to the heirs. 

This option is particularly appealing if the home’s value has appreciated or if the heirs are unable or unwilling to take on the financial responsibilities of homeownership.

Pay off the mortgage

Heirs can also choose to pay off the reverse mortgage without refinancing. This could be done with other assets, savings, or possibly through life insurance proceeds received upon the borrower’s death. Paying off the mortgage allows the heirs to keep the property free of liens.

Deed-in-lieu of foreclosure

If the heirs decide not to keep the home, they can also opt for a deed-in-lieu of foreclosure. 

This process involves transferring property ownership to the lender to satisfy the loan, thus avoiding foreclosure. It might be considered if selling the home is not feasible or if the heirs prefer a quicker resolution.

Ask the expert

Andrew Steger

CFP®

While no situations are ever the same, there is no one-size-fits-all strategy. In this situation, it is always best to examine the pros and cons of each option. Generally, if there is no surviving spouse and home prices are reasonable, many will often allow the house to be sold and the proceeds to pay off the mortgage.

FAQ

Does what happens to a reverse mortgage if you die change based on your type of reverse mortgage?

The outcome of a reverse mortgage at the borrower’s death remains consistent regardless of your type of reverse mortgage. When you pass away, the estate or heirs are responsible for settling the loan. 

They can do this by selling the residence or refinancing the loan, assuming they wish to keep the property. This also applies to Home Equity Conversion Mortgages (HECM).

What are the immediate legal obligations of the heirs when a reverse mortgage holder dies?

Upon the death of the reverse mortgage holder, the immediate legal obligation rests on the heirs to contact the lender. For most reverse mortgages, the loan becomes due and payable. 

The heirs can repay the debt, often by selling the home, refinancing the loan, or settling the debt using other assets from the estate. By law, the heirs are not personally liable for the debt. The mortgage ensures that if the home sale doesn’t cover the loan, the lender will suffer the loss, not the heirs.

What happens if the reverse mortgage exceeds the home’s value at the time of the borrower’s death?

In situations where the reverse mortgage exceeds the home’s value at the borrower’s death, federal law ensures that heirs are not responsible for the shortfall. The reverse mortgage is a non-recourse loan. That means the lender can only use the home’s value as the loan’s repayment. 

If the home’s sale does not cover the debt, the insurance the borrower paid for over the life of the loan covers the difference. So the lender recoups its money, and the heirs have no additional financial obligations related to the reverse mortgage.