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How to Handle a Reverse Mortgage After Death
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Reverse mortgages allow seniors to live in their homes without making additional mortgage payments and can also provide retirees with much-needed cash. But like all loans, reverse mortgages eventually need to be paid back. Paying back the mortgage can get complicated, depending on how much equity you have in your house and whether you want the house to stay in your family after your death.
If you are a reverse mortgage borrower, it’s important to have a plan to deal with your loan after you die. And if you’re a family member, you need to understand what your options might be for keeping the house, as well as your responsibility for paying off the loan.
What is a reverse mortgage?
Reverse mortgages are loans that allow seniors to borrow against their home equity during their retirement years. Unlike most mortgages, borrowers don’t have to make monthly payments on a reverse mortgage. The loan gets paid off after the borrowers move out of the house or die.
Since 1990, the Federal Housing Administration (FHA) has endorsed over 1 million Home Equity Conversion Mortgages (HECMs). HECMs are the most common type of reverse mortgage. The other type is a jumbo reverse mortgage. These loans typically make sense for borrowers with at least $1 million in home equity.
How is a reverse mortgage paid back?
A reverse mortgage has to be paid off when the borrowers move out or die. These are the options for paying off a reverse mortgage before or after the borrower’s death.
Sell the house and pay off the mortgage balance. Usually, borrowers or their heirs pay off the loan by selling the house securing the reverse mortgage. The proceeds from the sale of the house are used to pay off the mortgage. Borrowers (or their heirs) keep the remaining proceeds after the loan is paid off.
Sell the house for less than the mortgage balance. HECM borrowers who are underwater on their house can satisfy their loan by selling the house for 95% of its appraised value and using the difference to pay the HECM. Even though the sale may not cover the balance due on the loan, the Federal Housing Administration (FHA) doesn’t allow lenders to come after borrowers or their heirs for the difference, and this won’t hurt your credit score. Borrowers with jumbo reverse mortgages need to check with their lender to see if they are liable to repay any difference after the home is sold.
Provide lender a deed in lieu of foreclosure. Many reverse mortgage borrowers die with reverse mortgage balances that are higher than the value of the home. When heirs inherit an underwater house, they may decide that the easiest option is to provide the lender with a deed instead of having to go through the time and cost of foreclosure. Choosing this option will not hurt your heir’s credit score. It’s also available to reverse mortgage borrowers who want to move, but providing a deed in lieu of foreclosure will hurt your credit score.
Have a child take out a new mortgage on the house after your death. An heir who wants to keep a house can either pay off the HECM or take out a new mortgage to cover the balance of the reverse mortgage. If the balance on the reverse mortgage is higher than the value of the home, heirs can buy the house for 95% of its appraised value.
Heirs who want to keep a house should start applying for a new mortgage soon after a borrower’s death because the FHA only allows six months for the estate to pay off the HECM. During those months, the balance on a reverse mortgage continues to grow, which makes dealing with the reverse mortgage right away even more important.
Refinance to a forward mortgage. A borrower that wants to move out of a house but keep it as a rental property will need to find a way to pay off the reverse mortgage. To keep the property, borrowers may be able to use savings to pay off the reverse mortgage or refinance to a forward mortgage. Seniors refinancing to a forward mortgage will have to meet credit score, debt-to-income and down payment requirements.
Know how reverse mortgages work before a borrower’s death
To take out a reverse mortgage, all borrowers have to be at least 62 years old. Borrowers also must have substantial equity in their house. The amount of equity needed depends on the age of the borrowers. Younger borrowers need about 60% equity in their homes to take out a reverse mortgage whereas borrowers over age 80 may only need 45%-50% equity.
When borrowers take out a reverse mortgage, the reverse mortgage pays off all other loans on their house including home equity lines of credit. If the lender approves them for a higher amount, borrowers can continue to borrow more money against their home. Borrowers can continue to draw money from their mortgage until they reach a principal limit based on the borrower’s age, the interest rate on the mortgage and the value of the house.
With reverse mortgages, the balance on the loan grows over time. In some cases, the balance on a reverse mortgage may grow to be more than the value of the house. However, seniors who take out HECMs don’t have to worry about losing their homes. HECM borrowers cannot lose their home as long as they continue to pay for taxes, insurance and maintenance on the property. Borrowers who take out jumbo reverse mortgages may not have all these protections.
Keeping up with those extra costs is important; if they’re not paid, a reverse mortgage borrower runs the risk of defaulting on their loan, which means a lender could decide to foreclose on the property. When a lender forecloses, a borrower is forced to pay back a reverse mortgage. More often, a foreclosure forces borrowers to move from their home.
If you are a reverse mortgage borrower who decides to move out of your home, you are still responsible for paying off the loan or selling the house for at least 95% of its appraised value. If you can’t do either, you can provide the lender with a deed in lieu of foreclosure, but this will stay on your credit report for up to seven years.
When a reverse mortgage borrower dies, a lender will typically explain options for paying off the loan to the borrower’s estate. Heirs then have 30 days to decide what to do. If heirs decide to pay off the HECM, they have six months to sell the property or pay off the HECM, possibly with a new mortgage.
Spouses and partners have both rights and obligations
When you and your spouse are co-borrowers on a reverse mortgage, neither of you have to pay back the mortgage until you both move out or both die. Even if one spouse moves to a long-term care facility, the reverse mortgage doesn’t have to be repaid until the second spouse moves out or dies.
Because HECMs and other reverse mortgages don’t require repayment until both borrowers die or move out, the Consumer Financial Protection Bureau (CFPB) recommends that both spouses and long-term partners be co-borrowers on reverse mortgages.
If your spouse is not a co-borrower on your reverse mortgage, then they may have to repay the loan as soon as you move or die. As for whether they can remain in your home without repaying, that depends on the timing of the HECM and the timing of your marriage.
If a reverse mortgage borrower took out an HECM before August 4, 2014, then a non-borrowing spouse does not have a guaranteed right to stay in the house. Instead, a non-borrowing spouse will either have to move out of the house or pay off the reverse mortgage within six months of receiving notice from the lender.
The rules are different for HECM loans that were issued after August 4, 2014. With these loans, an eligible, non-borrowing spouse can stay in the home after the borrowing spouse moves out or dies, but only if they meet these criteria:
- They must have been married to the reverse mortgage borrower at the time the loan was issued.
- They must be named as a spouse in the HECM documents.
- The borrower (if living) must annually certify that you are an eligible non-borrowing spouse.
If you’re an eligible non-borrowing spouse, the reverse mortgage will not need to be paid until you die or move out of the house.
Create a solid payoff plan
Your heirs should know your plan for paying off your loan after you die, and have the information and tools they need to execute your wishes.
Get a will
As part of your plan, make sure you have a will before taking out a reverse mortgage to ensure all your assets (including your house) are transferred to the correct person upon your death. Without a will, your house will go through a probate process and the state will decide who inherits your share of the house. A will is particularly important for reverse mortgage borrowers who have a spouse or long-term partner living with them.
Make sure your records are up to date
Under current tax laws, borrowers who use a reverse mortgage to buy or substantially improve their home may be eligible for a home interest tax deduction when the reverse mortgage is paid off. But the only way to prove whether the interest is deductible is to keep records that show exactly how you used funds from a reverse mortgage.
Decide which payoff option might work best
Most often, heirs simply sell a home after a reverse mortgage borrower dies, and your will can specify how you’d like any remaining proceeds to be used once a loan is paid off.
One way to pay off your reverse mortgage is to sell your home to your children while you’re still living, and use the proceeds to pay off the loan. You also have the option of renting the house back from your children while you’re alive. If you decide to do this, work with an estate planning attorney or an accountant to manage the sale of the home to avoid running into issues with gift tax laws.
If keeping a house in your family is important, consider paying off the reverse mortgage during your lifetime, possibly with assets like the cash value in a life insurance policy or money from an investment account.
The bottom line
Reverse mortgages are complicated loans, so borrowers and their heirs need to understand how to repay the loan when it comes due. By knowing and talking through the options in advance, reverse mortgage borrowers and their family members can decide what option makes the most sense for them.