What to Do About a Reverse Mortgage After Death: Reverse Mortgage Heirs Responsibility
Reverse mortgages allow homeowners age 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receive either in a single lump sum payment, monthly installments, or through a line of credit that allows funds to be withdrawn as needed.
Most of the 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).
While reverse mortgages do not require borrowers to make monthly payments toward the loan balance, as they would under a conventional “forward” mortgage, borrowers must continue to pay ongoing property taxes and homeowners insurance.
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
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.
What Happens to a Reverse Mortgage After the Death of the Borrower(s)?
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.
The options for the reverse mortgage after death include:
- Pay the loan balance in full;
- Walk away from the home (which would result in a foreclosure action by the servicer);
- Complete a deed in lieu of foreclosure (where the estate signs documents titling the property back to the investor).
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 complete a deed 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, 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.
Reverse Mortgage Heirs Responsibility: What’s the Timeline for Paying Off the Loan?
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 there is for any 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/estate fail to repay the outstanding due and payable 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.
Important Reverse Mortgage Facts to Consider
Communication with the loan servicer is critical to ensure a smooth transition for the reverse mortgage after death of the borrower.
But before this maturity event happens and heirs are required to make a prompt decision to satisfy the loan balance, ask the reverse mortgage professional working with your loved one questions to become familiar with the loan process and know what your responsibilities are as heirs of the borrower.
For starters, heirs should familiarize themselves with the various scenarios that trigger the reverse mortgage to become due and payable, as well as the occupancy requirements borrowers must follow under the terms of the loan.
If a borrower is absent from their primary residence for longer than 12 months, or have 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 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.
As an heir, it is in your best interest to know the ins and outs of reverse mortgages, and know what exactly your loved ones are getting involved with when taking out these loans.
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.