Reverse Mortgage Loans:
With almost 30 years of experience in the mortgage industry, I’ve encountered numerous situations where clients and their families are interested in the benefits of a reverse mortgage loan, but are concerned about what happens once the final borrower passes away.
In fact, many people avoid looking into reverses altogether because they mistakenly believe that their heirs would be responsible for paying off the loan.
Thankfully, the Home Equity Conversion Mortgage (HECM), by far the most popular type of reverse mortgage, never needs to be paid out of pocket and includes robust protections for both borrowers and their heirs.
In this brief but informative guide, I’ll show you how reverse really works so you can make an informed decision for you and your loved ones.
Understanding Reverse Mortgages: A Quick Refresher
Before we dive into the specifics of what occurs when a reverse mortgage borrower passes, let’s briefly recap what HECMs entail. HECMs are by far the most common type of reverse mortgage loan, so much so that when most people say “reverse mortgage,” they really mean HECM. In fact, HECMs account for 90% of reverse mortgage loans today.
HECMs convert a portion of a home’s equity into tax-free cash (that can be used for virtually any purpose) in a variety of payout options. If you’re brand new to HECMs, this article would be a great place to start.
HECMs have become so popular because they’re federally insured by the FHA. Some of these features are super important for how HECMs work with inheritance, here’s why.
Home-Secured Loans
HECMs are secured home loans, which means the home is the collateral for the loan. In practice with HECMs, this means the sale of the home is ultimately what pays off the loan. This is why the borrower or their heirs will never be required to pay for the HECM out of pocket.
Non-Recourse Loans
This is a direct feature of FHA insurance that makes HECMs so beneficial for estate planning. A non-recourse debt means a creditor can only use the agreed-upon collateral, not any other assets, to satisfy the debt. For HECMs, the home is the collateral.
To show how powerful this is, here’s a hypothetical (but very realistic) example. Say someone gets a HECM on their home when housing values are their peak to ensure they get the maximum equity from the loan. But when they pass away years later, the housing market is at an all-time low.
Let’s say in this scenario, the sale of the home only covers 50% of the HECM loan balance. That means the estate will be required to pay, potentially thousands of dollars, right? Wrong! FHA insurance covers the difference, ensuring that the heirs do not have to pay a penny out of pocket to satisfy the loan.
How the Borrower’s Passing Works with a Reverse Mortgage
Now that we see how heirs are protected by HECMs from out-of-pocket expenses, let’s dive into the mechanics of the loan repayment and options for heirs. When the last HECM borrower passes away, it triggers a series of events.
First, the loan becomes due and payable and the lender must be notified of the borrower’s death as soon as possible. This notification typically is the start date of various deadlines and options available to the heirs. The primary concern at this point is determining how the loan will be repaid and what will happen to the property.
Options for Heirs After the Borrower’s Passing
The heirs of the HECM borrower generally have several options to consider:
- Repay the loan and keep the home: Heirs have the first right of refusal to buy the home. So if they want to keep it, they can purchase it, and this price is typically capped at 95% of the home’s market value. It’s worth noting that this price cap is another HECM protection from FHA insurance!
- Sell the home: If the home’s value exceeds the loan balance, heirs can sell the property, repay the reverse mortgage, and keep any remaining proceeds.
- Deed the home to the lender: In cases where the loan balance exceeds the home’s value, heirs may opt to simply turn over the property to the lender through a deed in lieu of foreclosure.
- Short sale: If the home’s value is less than the loan balance but heirs want to sell, they may negotiate a short sale with the lender.
Time Frames and Deadlines for Settling the Reverse Mortgage
While time is of the essence when dealing with a reverse mortgage after the borrower’s death, heirs generally feel that the deadlines are very reasonable:
- Initial grace period: Usually 30 days from the borrower’s death to notify the lender and begin the settlement process.
- Deciding on a course of action: Heirs generally have up to 6 months to decide whether to keep, sell, or sign over the deed of the property.
- Potential extensions: In some cases, heirs may be granted up to two 3-month extensions, providing a total of up to 12 months to settle the reverse mortgage.
Protecting the Home: Steps Heirs Can Take
For heirs interested in keeping the home, there are several steps they can take to protect their interests:
- Act quickly: Promptly notify the lender and begin exploring options.
- Assess the property’s value: Obtain a professional appraisal to understand the home’s current market value.
- Review loan documents: Carefully examine the reverse mortgage terms and conditions.
- Explore refinancing options: Consider traditional mortgages or other financing to pay off the reverse mortgage.
- Maintain the property: Keep up with taxes, insurance, and maintenance to avoid default.
Taking these proactive measures can help heirs navigate the process more smoothly and increase their chances of retaining the property if desired.
Deciding What’s Right for You and Your Loved Ones
Many people want to leave a home to their loved ones that’s free and clear. While I understand that desire, it’s really important to consider how utilizing your home equity in life—through a HECM—can protect and in many cases increase the legacy you leave behind.*
For many homeowners, the HECM funds enable them to protect and grow their retirement assets, leaving behind a far greater legacy than their home could otherwise provide. For homeowners with cashflow problems who rely on their adult children for financial support, a well-managed HECM can provide life-changing relief for all involved.
My goal isn’t to sell you anything; it’s to let you know about your options to enhance your golden years with the home equity you’ve earned throughout your life. If you want to find more information for yourself, my website has a lot more to offer, including info about HECMs, top benefits for homeowners, how reverses can be used to purchase a new home, and myths and facts about the product.
My goal isn’t to sell you anything; it’s to let you know about your options to enhance your golden years with the home equity you’ve earned throughout your life. If you want to find more information for yourself, my website has a lot more to offer, including info about HECMs, top benefits for homeowners, how reverses can be used to purchase a new home, and myths and facts about the product.
But if you’d like to ask me questions directly, or are interested in getting started with a HECM, please reach out to me today, I’m always happy to help.