What Happens When the Reverse Mortgage Repayment is Due?

As a financial advisor, you may encounter questions from clients about what happens to a reverse mortgage when the borrower passes away. Common concerns include whether heirs will inherit a financial burden or if the lender will take possession of the home. In this article, we’ll address these concerns, clarify misconceptions, and outline the key deadlines heirs should be aware of when settling a reverse mortgage.

Understanding Reverse Mortgage Basics

Before diving into the repayment process, it’s essential to review some basic facts about reverse mortgages, particularly the Home Equity Conversion Mortgage (HECM)—the most common type of reverse mortgage in the U.S., insured by the FHA.

A HECM allows homeowners aged 62 and older to convert a portion of their home equity into available cash without the requirement for monthly mortgage payments. As long as one borrower or a non-borrowing spouse lives in the home, maintains it, and pays property charges (such as property taxes, insurance and HOA dues), the loan remains active.

Importantly, the HECM is a non-recourse loan, meaning the repayment will never exceed the value of the home at the time of sale. Any shortfall between the loan balance and the home’s value is covered by the FHA, ensuring heirs are not left with a financial burden beyond the home itself.

Reverse Mortgage Repayment After Death

When there are two borrowers, such as a married couple, on the loan and one passes away or must relocate to a care facility, nothing happens.  The remaining borrower can remain in the home as long as they want, but property charges must remain current as before.  The remaining borrower has complete access to any unused loan proceeds.

When the last borrower or non-borrowing spouse (NBS not allowed in Texas) passes away (or sells, or moves out permanently), the reverse mortgage becomes due. However, contrary to popular belief, the lender does not automatically take possession of the home. Instead, the heirs have options to settle the loan balance, either by keeping the property or selling it. Here's what they need to know:

1. Repayment Options:

   • Pay off the loan: Heirs can pay the lesser of the loan balance or 95% of the home's appraised value. This can be done through refinancing or using other financial resources.

   • Sell the home: Heirs can choose to sell the home, settle the loan balance from the sale proceeds, and retain any remaining equity.

   • Deed in Lieu of foreclosure: If heirs prefer not to keep or sell the home, they can transfer the property to the lender, who will handle the sale.

   • Do nothing: If the heirs take no action, the lender will initiate foreclosure and sell the home to recover the loan balance.

2. Critical Deadlines:

   • 90 Days: Heirs typically have 90 days to either repay the loan or begin the process of refinancing if they wish to keep the home.

   • 6 Months: If the heirs intend to sell the home, they have an initial window of 6 months to complete the sale. During this period, foreclosure cannot proceed.

   • 12 Months: If the home has not sold within six months, heirs can request up to two 90-day extensions, giving them up to one year to complete the sale before foreclosure must begin.

Communication is Key

Once the reverse mortgage becomes due, the loan servicer will issue a Due and Payable Notice to the heirs, often accompanied by an appraisal to assess the current market value of the home. It’s crucial for heirs to communicate with the servicer and keep them informed of their intentions—whether they plan to keep the home, sell it, or pursue another option.

Failure to respond to the Due and Payable Notice could result in foreclosure proceedings starting as early as 90 days after the notice is issued. Open and proactive communication can help ensure that all parties are aware of the heirs’ plans and avoid unnecessary complications.

Foreclosure and Non-Recourse Protection

Even if the lender initiates foreclosure due to inaction, heirs can still pay off the loan balance or sell the home at any time to stop the process. Importantly, heirs benefit from the HECM’s non-recourse feature, meaning that even if the home is worth less than the loan balance, the most that must be repaid is the home’s value. The FHA insurance will cover any shortfall, protecting the heirs from personal financial liability.

Conclusion

For financial advisors, understanding the intricacies of HECM repayment is critical when guiding clients and their heirs through the estate planning process. While the reverse mortgage does come due upon the borrower’s death, heirs have multiple options and a reasonable timeframe to settle the balance without fear of financial loss beyond the home’s value.

By proactively planning and communicating with the loan servicer, heirs can manage the situation smoothly, whether they choose to keep, sell, or relinquish the home to the lender. Ultimately, the key is to approach the reverse mortgage repayment process with a clear strategy and an understanding of the available options.