Reverse mortgage after death: a timeline for heirs

What happens to a reverse mortgage after death?

A reverse mortgage after death works like this: the loan becomes due and payable once the last borrower dies. If there's a co-borrower, or an eligible spouse who isn't on the loan but qualifies to stay, the loan waits until that person dies or moves out. Heirs don't take over the loan. They decide what to do with the house, and the loan is paid off from that decision.

This article covers the HECM, the federally insured reverse mortgage most people have. Private (proprietary) reverse mortgages can follow different rules, so read the loan documents if that's the kind of loan your family has.

The timeline, step by step

Every family's timing is a little different, but the steps usually go in this order:

Interest and mortgage insurance keep adding to the balance while the loan is open, so moving steadily usually leaves more equity for the family.

What are the heirs' choices?

Heirs generally have four options:

1. Sell the home and keep what's left. If the home is worth more than the loan balance, the loan is paid from the sale and the rest goes to the estate or heirs.
2. Keep the home. Heirs pay off the loan, often with a mortgage of their own. When the balance is higher than the home's value, the Consumer Financial Protection Bureau says the payoff is the lesser of the balance or 95% of the appraised value. Ask the servicer to confirm the payoff amount in writing.
3. Sell for 95% of the value. If the home is worth less than the loan, heirs can sell for at least 95% of the appraised value and the loan is considered paid. The FHA insurance, which the borrower paid for, covers the rest.
4. Hand the home back. Heirs who don't want the home can sign a "deed in lieu of foreclosure," which turns the house over to the lender and settles the loan.

Any of these is better than doing nothing. If no one responds, the lender can move to foreclosure.

Will the kids owe money?

No. A HECM is a non-recourse loan, which means the debt can never be more than the home is worth, and heirs aren't personally responsible for any shortfall. The home pays off the loan, not the family's other savings.

A simple example: The loan balance is $560,000 and the home appraises at $500,000. Heirs who want to sell can accept an offer of $475,000 (95% of the value), and the loan is settled. The $85,000 gap is covered by the FHA insurance, not by the heirs.

What heirs need to keep up while they decide

Until the home is sold or signed over, someone needs to keep paying the property taxes and homeowners insurance and look after the house. Missed taxes or a lapsed policy can cause problems quickly, even during the extension period. Keep copies of everything: the due and payable letter, the appraisal, listing agreements and offers. Those papers are what support an extension request.

What parents can do now

The easiest settlements start with a conversation years earlier. If you have a reverse mortgage, or are thinking about one:

• Call your servicer and confirm who is listed on the loan, especially your spouse.
• Tell your heirs who your servicer is and where your loan statements are kept.
• Explain the four choices above, so the kids aren't learning them during a hard week.
• Talk with an estate planning attorney about how the home fits into your plan.

Our guide for families covers how adult children can help a parent decide, and the FAQ answers more questions about spouses and heirs.

When a reverse mortgage may not be the right fit

If leaving the home to your children free and clear is a top priority, a reverse mortgage works against that goal, because the balance grows over time. The same is true if a child plans to live in the home later but couldn't qualify for a loan to pay it off. In those cases, compare other choices, like downsizing or a traditional home equity loan, and bring your heirs into the conversation before you decide. A free session with a HUD-approved housing counselor is a good place to talk it through.