After death, what happens to reverse mortgage loan SantaClara? Do heirs inherit a mess? The bank gets the house? Many homeowners worry about the legacy a reverse mortgage will leave. Reverse mortgages are designed for both homeowners and heirs.
Let me cover some basics before addressing these questions and concerns. Misinformation about reverse mortgages abounds. Before discussing reverse mortgages after death, let's clear the air. If you know the basics, read on. Check out this article for more reverse mortgage details.
Reverse Mortgages
A reverse mortgage allows 62-year-olds to convert home equity into cash. Most popular reverse mortgage is the FHA-insured HECM. HECMs are used for reverse mortgages.
As long as one borrower (or non-borrowing spouse) lives in and maintains the home, no mortgage payments are required.
You can always leave your home to your heirs. Your heirs can inherit the remaining home equity.
HECM is a non-recourse loan; the maximum repayment is the home's value. FHA pays the difference if your home isn't worth enough to cover the loan.
Other proprietary (or "jumbo") reverse mortgage products are available for homeowners with home values over $1 million. This only applies to HECMs. Other products may work differently.
After death, what happens to a reverse mortgage?
After August 4, 2014, the following applies to HECM reverse mortgages. HECMs originated before August 4, 2014 may be treated differently (mainly with regard to non-borrowing spouses).
After death, what happens to a reverse mortgage? This depends on the circumstances and what your heirs do with the home. We'll cover each scenario.
One dead borrower
Nothing changes if one of two borrowers (a married couple, for example) dies. The remaining borrower can stay in the home without a mortgage if they maintain it and pay property taxes.
Surviving borrower can use unused funds. If the reverse mortgage is a tenure plan, payments continue for the surviving spouse. If the reverse mortgage is a line of credit, the available credit will grow.
The surviving spouse is unaffected.
Non-borrowing spouse survives borrower
Non-borrowing spouses (NBS) are not full reverse mortgage borrowers. Age is the most common reason a spouse doesn't borrow. HECM reverse mortgages require a 62-year-old minimum age.
In April 2014, HUD changed the HECM to protect non-borrowing spouses. Before the change, only 62-year-olds could be full reverse mortgage borrowers. This could be disastrous for younger spouses if the older spouse died. The older spouse's death made the loan balance due in full. The younger spouse had to pay off or refinance the loan balance or give up the home. Unsurprisingly, non-borrowing spouses suffered.
HUD resolved the issue, thankfully. Non-borrowing spouses can use a deferral period to stay in the home after the older spouse dies. The non-borrowing spouse can keep the home if they maintain it and pay property taxes.
Non-borrowing spouses "inherit" HECM protections but not remaining funds. When the older spouse dies, any remaining term/tenure payments or credit lines are closed.
All borrowers/non-borrowers die
Once the last borrower or non-borrowing spouse dies, the reverse mortgage is due in full. The rumour that the bank gets the house in the end is false. The heirs can keep the house. Lenders lend money, not buy homes. Lenders want their money back, not the home.
When all borrowers and/or non-borrowing spouses die, the servicer sends heirs a Due and Payable notice. Servicers may order home appraisals to determine market value. Heirs can pay for their own appraisal.
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