A reverse mortgage is a special type of mortgage given by reverse mortgage lenders that lets homeowners age 62 and up turn their home equity into cash. The FHA-insured home equity conversion mortgage, or HECM, is the most prevalent type of reverse mortgage (often pronounced heck-um by industry insiders). It's likely that the person you know who received a reverse mortgage also received a HECM.
As long as at least one borrower (or non-borrowing spouse) resides in the property, maintains it, and pays the necessary property charges, no mortgage payments are necessary.
Your house is always yours, and you are free to transfer it to your heirs. The home's residual equity can be passed on to your heirs (more on that in a moment).
The maximum that must be reimbursed under the terms of the HECM is the value of the home. If the value of your house is insufficient to pay down the entire loan, FHA will cover any shortfall.
Although there are further proprietary (or “jumbo”) reverse mortgage options available, they are usually intended for homeowners whose homes have values above $1 million. This discussion will only apply to the HECM. Different reverse mortgage products could operate in different ways.
What Takes Place With a Reverse Mortgage Following Death?
What happens to a reverse mortgage after the borrower dies? Depending on the situation and what your successors decide to do with the house, there are a few possible options for answering this question. We'll go over each potential outcome one at a time.
Death of All Borrowers And/Or Non-Borrowing Spouses
Again, at the demise of the final borrower or non-borrowing spouse, the remaining sum of the reverse mortgage becomes due and payable in full. It's possible that you've heard the notion that the bank would ultimately wind up owning the home, but this is untrue. The house is available for the heirs to keep if they so choose. Always keep in mind that mortgage lenders lend money, not buy houses. The lender's objective is to recoup its investment, not to ultimately own the property.
The servicer will send a Due and Payable notification to the heirs as soon as it is known that all borrowers and/or non-borrowing spouses have passed away. For the purpose of determining the home's current market worth, the servicer may also request an appraisal. Additionally, the heirs are free to pay for their own appraisal upon request.
The following are the choices available to the heirs for paying off the reverse mortgage balance:
To keep the house, pay the lesser of the loan balance or 95% of the appraised value. The loan sum can be paid off by the heirs refinancing or utilising other resources like savings or life insurance payouts.
Sell the property, pay off the remaining debt, and pocket the profit. The sale procedure is the same as it would be for any other kind of mortgage. You work with a real estate agent (or sell it yourself, if you'd rather), sell the home, and after the sale is final, pay back the remaining loan sum. Equity that remains is transferred to the estate.
Give a Deed in Lieu of Foreclosure to the lender. The servicer receives the deed from the heirs and then sells the property to cover the loan sum.
Avoid action. To sell the property and recoup the outstanding loan sum, the lender uses the foreclosure procedure.
If the heirs fail to pay the sum in accordance with the Due and Payable Notice, HUD mandates the lender to start the foreclosure process. The due and payable notice must be sent out at least 30 days before foreclosure can start, but not earlier than 90 days later.