Reverse mortgages are an excellent option for seniors who need cash for home renovations, medical bills, or to live comfortably in retirement.
Reverse mortgages only have to be paid off once the owner no longer lives in their home. For some, this comes when it’s time to move, but many seniors make plans for their heirs to take over the reverse mortgage in their wills as well.
But how does a reverse mortgage work if you die? Today, we’ll take a look at what’s happening so you or your heirs can be prepared for the future.
What Is A Reverse Mortgage?
A reverse mortgage is a loan available exclusively to people over the age of 62 who want to use their home equity. To be eligible, you must own at least 50% of your home, and it must also be your primary residence (meaning you live there most of the year).
Reverse Mortgages Allow seniors to access funds without worrying about immediate repayment. But when you leave the house, the reverse mortgage reaches maturity and must be repaid. That process can become complicated when someone passes away, leaving an heir in charge of their estate.
If The Borrower Dies, What Happens To The House?
So here’s the question: how does a reverse mortgage work if you die?
When an owner dies, the responsibility of the house will pass to whoever is indicated in a will. If someone dies without a will, the property will be bequeathed to direct descendants or close relatives.
The heir will then be in charge of paying the reverse mortgage. There are several options for handling loan payoff.
If money is still owed on loan, the borrower can still leave the house to their heirs. If you have a reverse mortgage and you pass away, just as you still own your home, your heir may own the home after your death. But they will have to bear the balance of the loan.
How To Pay Off The Loan Balance
We get a common question from homeowners: how does a reverse mortgage work if you die and your heir can’t immediately pay off the loan balance?
There are a few different options depending on what the heirs want to do with the house. Let’s examine the available routes.
SELLING THE HOUSE
One of the most common ways to pay off a reverse mortgage is selling the home in question. If the heir cannot pay the loan in person, this is the easiest way to meet the loan terms.
After the borrower has passed away, the home will need an appraisal by an expert sent by the loan servicer. They will determine the market value of the home. This evaluation can result in two possibilities:
- The home is worth more than the loan balance.
- The house has depreciated. The value of the house is less than the balance of the loan.
In the first scenario, you can sell the house and walk away with the money left over from the sale after paying off the loan.
However, if the house has lost value, don’t despair!
Most reverse mortgages are non-recourse loans. With this provision, no matter how much interest has accumulated over time, you will never owe more than the home is worth. Its value depends on the property’s estimated value at the time the loan is due, not when it is received.
How does that look for you as an heir? It means you don’t need to worry about a considerable amount of interest hanging over your head. Simply selling the house will satisfy the repayment terms.
KEEPING THE HOUSE
If the heir wants to keep the house, he must pay the entire loan.
An appraiser will determine the market value of the home. You will owe no more than its market value. You will only owe the entire loan balance if it is less than the house’s value.
DELIVERY OF KEYS
While selling the house would pay off a reverse mortgage, it can be an unnecessary hassle for the borrower’s heir. It may be easier to hand over the keys to the lender.
Consider this if:
- The house is worth less than the loan balance.
- The heir has no interest in keeping the house and paying the balance.
- There is no hope of recovering the capital from the sale.
If this is your situation, you may not want to deal with the hassles of selling the house. With a “deed-in-lieu of foreclosure,” the lender will repossess the home, and the debt will count as discharged.
When Is The Loan Repayment Due?
When your loan reaches maturity, it’s time to pay off the balance. You can trigger maturity with a reverse mortgage through the sale of the home or the borrower’s death.
This situation is why heirs should be aware of reverse mortgages. As soon as the expiration event occurs, the repayment term will expire.
Heirs should contact the loan provider as soon as possible to discuss payment options. Communication is vital to pay off a loan linked to a house. A provider can foreclose within thirty days to six months from the loan date.
Extensions may be possible. However, these will not be on the table unless the heir contacts the service provider. These extensions may also require the correct documentation. Such situations would apply if you arranged the sale of the house or the finances to pay off the balance.
Do You Need Help With Your Reverse Mortgage?
We are preparing to handle a reverse mortgage after the borrower’s death. But it does not have to be like that!
Hopefully, we’ve answered your questions about how reverse mortgages work when a homeowner dies. Contact our team to learn more about reverse mortgages, including qualifying for one. Our passion is helping seniors live their retirement in financial comfort!