If your aging parents have a reverse mortgage, you’ll need to understand what happens to that debt when they die. A lender may want things to move quickly when the time comes, so it’s essential that you be prepared.
How to deal with a reverse mortgage after parents die
- As an heir, you and any other heirs will receive a letter from the loan servicer, explaining the rules and asking what you intend to do about the loan and property.
- Answer the servicer to the best of your ability. Keep communication open.
- If you want to keep the home, you must pay off the loan. You won’t owe more than 95 percent of the home’s appraised value, even if the loan balance is more than that.
- If the home is worth more than the amount owed, you may sell the home and keep the difference.
- You may sign a deed-in-lieu of foreclosure and give the house to the lender if you don’t want the home and the loan balance exceeds the home’s value.
When borrower dies, the loan comes due
Nearly all reverse mortgages today are home equity conversion mortgages, or HECMs, insured by the Federal Housing Administration. HECMs are subject to certain federal rules.
The first thing adult children should know is that these reverse mortgages technically become due and payable when the last borrower has died.
The word “technically” is important because it’s understood that a borrower’s heirs can’t possibly refinance or sell the home on the day of death to satisfy the debt, explains Beth Paterson, a certified reverse mortgage professional at Reverse Mortgages SIDAC in St. Paul, Minnesota.
Heirs will hear from loan servicer
Instead, what usually happens is that the loan servicer sends a letter that Paterson says might seem insensitive but is intended to inform the heirs of the rules and lay down some expectations.
“The servicing companies have had issues with people not notifying them (when a borrower has died) and trying to stay in the home, so that’s why it needs to be harsh,” Paterson says. “My conversation to the consumer is that communication is vital.”
Lender will know when a borrower has died
Servicers use a number of resources to make sure they’re informed about borrower deaths. These include the Social Security death index, proprietary databases and annual occupancy letters that typically are sent to reverse mortgage borrowers.
“If they don’t get the letter of occupancy back or property taxes or insurance aren’t paid, they start doing the next steps: contacting an alternate contact, searching other records or sending someone out to inspect the property and see if someone is living in the house,” Paterson says.
Heirs have options
While the heirs must pay off the reverse mortgage, they’re not required to sell the home, says Cara Pierce, a financial specialist at Clearpoint Credit Counseling Solutions in Fresno, California.
But if heirs want to keep the house, they’ll have to figure out some way to satisfy the loan.
“If they want to get a loan in their own name and pay off the reverse mortgage, they can,” Pierce says. “But if they can’t and there are no other assets, like life insurance, other property or a 401(k) that they could use to pay off the loan, they will have to sell the property.”
Heirs typically can choose their own real estate broker if they decide to sell. The heirs manage the sale and keep any capital gain after the loan and closing costs have been paid.
A tenant living in the property might have certain rights and protections under state law.
When a surviving spouse wasn’t a borrower
A borrower’s surviving spouse might be able to remain in the home even if he or she wasn’t a co-borrower, says Sarah Mancini, an attorney at the National Consumer Law Center, a nonprofit advocacy organization in Washington, D.C.
That’s important, Mancini explains, because some borrowers remove a younger spouse from their home’s title to secure a larger reverse mortgage, leaving that younger spouse vulnerable to eviction and foreclosure after the older spouse’s death.
To stay in the home, a non-borrower spouse may need the help of an attorney.
“There are serious legal issues,” Mancini says, “and possible grounds for a legal challenge if the lender forecloses while there is still a surviving spouse.”
When a loan is upside-down
The loan servicer usually will order an appraisal to determine how much the home is worth, Paterson says. If the reverse mortgage is upside-down — meaning the loan balance is higher than the home’s market value — the heirs are required to pay off no more than 95 percent of the appraised value.
Another option for heirs is to sign a deed-in-lieu of foreclosure, giving the house to the lender, to resolve the situation more quickly.
Once the property is sold or handed over to the lender, the debt is considered satisfied and can’t be pursued further against the heirs or the borrower’s estate.
Heirs shouldn’t wait
If the heirs don’t act on their own, the lender can foreclose.
Time frames vary. According to the Department of Housing and Urban Development, or HUD, heirs can get an extension in some cases if a reasonable effort is being made to refinance or sell the home, and if the lender and HUD agree to allow more time.
The bottom line, Paterson says, is that “if the servicer is not hearing from the family, they will start foreclosure proceedings.”