After death, what happens to a reverse mortgage? Will there be a significant mess for the heirs to clean up? Does the house ultimately go to the bank? Many homeowners are worried about leaving a legacy as a result of getting a reverse mortgage loan SantaClara, which is understandable. The reverse mortgage, thankfully, was created with the homeowner and heirs in mind.
Let me first go over some fundamentals before I respond to these queries and the issues they raise. There is a lot of false information about reverse mortgages, especially in this area. Before we discuss how a reverse mortgage operates after death, let's make sure the facts are clear. Feel free to skip ahead to the rest of the article if you are already familiar with the fundamentals. Check out this article for more information on reverse mortgages than what we will discuss here.
Basics of Reverse Mortgage
A reverse mortgage is a special type of mortgage 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 in America (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?
For HECM reverse mortgages with case numbers after August 4, 2014, take note that the following rules apply. Treatment of HECMs created before August 4, 2014 may see a few minor differences (mainly with regard to non-borrowing spouses).
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.
One borrower dies, two borrow,
Nothing changes if the loan has two borrowers (a married couple, for instance), but only one of them dies. As long as they maintain the property and pay the necessary property taxes, the remaining borrower may continue to live in the house without making mortgage payments.
The survivor borrower will still have access to any unspent funds. For instance, if the reverse mortgage was set up as a tenure plan, the surviving spouse will continue to receive tenure payments. The available credit will remain open and increase if the reverse mortgage was set up as a line of credit.
Again, the surviving spouse's situation remains unchanged.
Death of Borrower, Survival of Non-Borrowing Spouse
A spouse who is not included as a complete borrower on the reverse mortgage loan agreement is referred to as a non-borrowing spouse (NBS). The most frequent cause of a spouse not borrowing is age, however there are other causes as well. The HECM reverse mortgage has a minimum eligibility age of 62.
In order to better safeguard non-borrowing spouses, the Department of Housing and Urban Development (HUD) announced significant adjustments to the HECM in April 2014. Before the modification, the reverse mortgage loan agreement could only have full borrowers who were at least 62 years old. If the older spouse died, this constituted a significant potential hazard for spouses under the age of 62. A maturity event that made the loan sum fully due and payable was the death of the senior spouse. The younger spouse (who was not party to the loan agreement) was forced to choose between giving up the house or paying off or refinancing the loan debt. Unsurprisingly, this had some negative effects on the spouses who did not borrow.
Thankfully, HUD found a solution to the problem. Today, if the senior spouse dies, the non-borrowing spouse can benefit from a so-called deferral period to continue residing in the home. As long as they keep it up and make the necessary property payments, the non-borrowing spouse may continue to reside there.
The HECM's built-in safeguards are “inherited” by non-borrowing spouses, but they are not given any of the remaining money. When the senior spouse passes away, any unpaid term/tenure payments are stopped, along with any open lines of credit.
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.
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