A reverse mortgage is a tool that allows homeowners 62 and older to tap into their home equity. Owners can receive payments every month, take out a lump sum or access money as they need it. The funds don’t have to be repaid as long as the owner lives in the house.
What Happens When a Reverse Mortgage Ends?
If the homeowner dies, sells the house or no longer uses it as a primary residence, the reverse mortgage must be repaid. In most cases, a reverse mortgage ends when the borrower passes away. If there were two borrowers on the reverse mortgage, when the last one passes away, the balance on the loan becomes due. In those situations, family members have to figure out what to do with the house and how to handle the outstanding loan balance.
One option is to repay the balance due and keep the house. Family members can pay off the loan balance or 95% of the home’s current value, whichever is lower.
The borrower’s heirs may also decide to sell the house. If the sale price is greater than the loan balance, family members get to keep the difference.
If the amount received is not enough to pay off the loan, the homeowner’s heirs can’t be held responsible for the difference because a reverse mortgage is a non-recourse loan. Borrowers pay for insurance from the Federal Housing Administration (FHA), so the lender will not be able to collect the difference between the sale price and the loan balance from a borrower’s heirs or other assets.
When Should Family Members Consider a Deed in Lieu of Foreclosure?
If the balance owed is greater than the current market value of the house, the homeowner’s heirs may sign a deed in lieu of foreclosure that will transfer ownership of the property to the lender to prevent foreclosure. That can be a quick way for heirs to get the house off their hands without having to try to sell it. It can also be beneficial to the lender, since reverse mortgage companies would rather not have to go through the time-consuming and expensive process of foreclosing on a property.
Understand Reverse Mortgage Rules and Options for Heirs
Ask questions about how much money you could receive, how the amounts and timing of withdrawals could affect the loan balance, and what that could mean for your family after your death. If a member of your family is considering a reverse mortgage or already has one, talk to the borrower and your other relatives about how to handle the outstanding loan balance and what to do with the house when your loved one dies so you won’t have to struggle to figure it all out while you’re grieving.
