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February 24, 2021
Managing all of the responsibilities of an estate after death can be incredibly stressful. If your family member had a reverse mortgage and you are the heir, it is important to quickly figure out what to do about the reverse mortgage after death. The heirs of reverse mortgage borrowers have a set of duties, even if they aren’t named on the loan documents.
Reverse mortgages allow homeowners aged 62 and older to convert a portion of their home equity into tax-free loan proceeds, which they can elect to receive either in a single lump-sum payment, in monthly installments, or through a line of credit that allows funds to be withdrawn as needed.
Most reverse mortgages available today are known as Home Equity Conversion Mortgages (HECMs). These products are insured by the Federal Housing Administration and regulated by the U.S. Department of Housing and Urban Development (HUD).
Reverse mortgages do not require borrowers to make monthly payments toward the loan balance as they would under a conventional “forward” mortgage. However, borrowers are still required to pay real estate taxes, utilities, hazard, and flood insurance premiums while they have a reverse mortgage.
Failing to maintain these payments and keep the house in good repair may be grounds for calling the loan due and payable.
The reverse mortgage loan balance becomes due and payable when the borrower either dies or otherwise permanently vacates the home for a period longer than one continuous year, which includes moving to a different home, as well as moving into an assisted living facility or nursing home.
While reverse mortgage holders don’t have a monthly mortgage payment, it’s important to remember the loan also becomes due if you stop paying your property taxes or homeowners insurance, or if you fail to maintain the property in good repair. “Failure to pay taxes and insurance is the number one reason behind most of the [reverse mortgage] foreclosures,” says Dan Larkin, divisional sales manager of Schaumburg, Illinois-based PERL Mortgage, Inc.
However, the most common reason a reverse mortgage becomes due is when the borrower has passed away, says Ryan LaRose, president and chief operating officer of Celink, a reverse mortgage servicer.
Once the reverse mortgage is due, it must be paid back in full in one lump sum, LaRose says.
Just as reverse mortgage borrowers are required to adhere to guidelines under the terms of their loans, heirs must also abide by certain requirements following the death of their borrowing parents.
Following the death of the borrower, the reverse mortgage loan servicer will send a Condolence Letter to all known heirs. This letter provides information to the heirs and borrower’s estate about the options available to them for satisfying the reverse mortgage loan balance.
Maintaining regular communication with the borrower’s reverse mortgage servicer is imperative during this process.
“The biggest thing is knowing that your best resource is to pick up the phone and call the servicer,” LaRose says. “If we don’t know what’s going on, we have to assume the worst — that they have no intentions of paying off the loan.”
So keeping in close contact with the servicer can actually be a benefit to the heirs or those responsible for the borrower’s estate.
“The sooner you can contact the servicer, the more time you’re going to have [to pay off the loan], which means the more options that are on the table,” according to LaRose.
The options for the reverse mortgage after death include:
Heirs (or the estate) may also choose to complete a short sale of the property securing the reverse mortgage. By doing so, the estate is able to sell the property to an unrelated third party for 95% of the home’s current appraised value, less any customary closing costs and realtor commissions.
Since reverse mortgages are “non-recourse” loans, heirs will never be required to pay more than 95% of the home’s appraised value — even if the loan balance grows to exceed the value of the home.
This also means that if the estate chooses to deed the property to the lender (in lieu of foreclosure, short sale, or have the servicer initiate foreclosure proceedings) there is no negative financial impact on the borrower’s heirs.
Heirs are required to submit documentation to the servicer, including a letter detailing their intentions with the property and a copy of the real estate listing, among other important documents.
In whatever manner the heirs or estate plan to satisfy the reverse mortgage loan balance, they must be mindful of certain timelines required under HUD rules.
How much time heirs have to settle the reverse mortgage loan balance largely depends on their communication with the servicer. The more frequent communication between the estate and the loan servicer, the less chance for surprises.
As long as the estate remains in regular communication and has provided the servicer with the required documentation, HUD guidelines will allow them time extensions for up to one year from the date of the borrower’s death.
If the heirs or estate fails to repay the outstanding loan balance, or if they fail to deed the property to the servicer within the prescribed time, HUD rules permit the servicer to begin foreclosure proceedings.
In the event that the estate is uncooperative or unresponsive to requests for information, the loan servicer does not have to wait the full 12 months to initiate foreclosure. If the estate is unable to pay the loan balance or is unwilling or unable to complete a deed in lieu of foreclosure within the 12-month period, then the servicer is required to begin foreclosure in an effort to gain the title of the property.
However, if the estate is making a reasonable effort to sell the property, HUD could grant extensions in 3-month intervals with the entire period not to exceed 12 months. Such allowances might vary on a case-by-case basis, which is why it’s important to keep the lines of communication open with the loan servicer.
Staying in constant communication with the reverse mortgage servicer can help extend the amount of time heirs have to repay the loan.
When requesting an extension, heirs must contact the servicer and provide documentation, such as a letter of hardship that details their intentions to repay the loan, a real estate listing, proof that they’re trying to obtain financing to keep the house, or probate documents.
The servicer will then take those documents to HUD, which can grant the servicer an extension.
Communication with the loan servicer is critical to ensure loans do not come due before the death of the occupant.
If your parent or loved one has a vacation home where they spend a portion of the year, it is especially important that they remain in open communication with their reverse mortgage servicer, since there are stated restrictions on how long borrowers are allowed to be absent from the property.
Borrowers should always reach out to their servicer to seek HUD approval before leaving on any extended trips or absences from their property that extend beyond 12 months.
If a borrower is absent from their primary residence for longer than 12 months or has permanently moved from their primary residence, then the loan servicer must seek approval from HUD to call the reverse mortgage due and payable.
Once approval is obtained, the servicer mails a demand letter to the borrowers requiring them to either repay the loan in full or cure the loan default by re-occupying the property as their principal residence.
If your loved one is considering a reverse mortgage, and you would like to know more about this financial product, contact us today for more information.
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