There are a lot of good reasons to consider a reverse mortgage. Improved cash flow, enhanced quality of life, more money available for healthcare and lifestyle expenses. But taking out a reverse mortgage, like any home loan, is a big decision. And it raises a lot of questions.
Among the biggest of those questions is, How does a reverse mortgage work when you die? And will a reverse mortgage cause problems for your heirs?
We’ll break down exactly what you, and your heirs, need to know about how a reverse mortgage works after you pass away and what their options may be at that time.
What is a reverse mortgage?
A reverse mortgage is a home loan that allows you to take part of the equity you’ve grown in your home and convert it to cash. You can receive the money as a lump sum payment, as monthly installments, a line of credit, or a combination of monthly installments and a line of credit.
Here’s how reverse mortgages work: Unlike a “forward,” or traditional mortgage, making a payment is optional on a reverse mortgage. You can make a payment if you want to. But if you don’t, that’s OK. The balance of the loan will come due when the last reverse mortgage borrower leaves the home or passes away.
There are three different types of reverse mortgages:
- Home Equity Conversion Mortgage (HECM)
- Proprietary reverse mortgages
- Single-purpose reverse mortgages
The HECM, which is backed by the Federal Housing Administration (FHA) under the U.S. Department of Housing and Urban Development (HUD), is the most common type of reverse mortgage and it’s what we will be referring to in this article.
Who qualifies for a reverse mortgage? Eligibility at a glance
Borrower Requirements for a Reverse Mortgage
- Youngest borrower must be at least 62 years old
- At least one borrower must live in the home a majority of the year
- The borrowers must pay property taxes, home insurance, repair, and HOA fees even if they choose not to make mortgage payments
- Borrowers must maintain the quality of the home
- Borrowers cannot be delinquent on any federal debts
- Must receive counseling with a HUD-approved reverse mortgage counselor
Property Requirements for a Reverse Mortgage
- Home must be your primary residence
- Must be an approved property type:
- Multifamily homes up to four units
- Some condos and manufactured homes
- Property must be kept in good condition and property taxes and homeowners insurance must be kept current
How does a reverse mortgage work when you die?
As long as the home is maintained and all taxes and insurance obligations are current, you won’t have to repay a reverse mortgage loan until the last borrower leaves the home or dies.
When that borrower passes away, the loan will come due. At that point, your heirs have a few options.
Co-borrowing spouses can stay in the home
If you and your spouse were both 62 or older when you took out the reverse mortgage and you are both on the loan, they may stay in the house after you pass away. The original loan terms will remain in effect, and mortgage payments will be optional until they leave the home or also pass away.
Note that if they move into assisted living for health reasons and they are there for a year, their lender can interpret that as vacating the property, and the reverse mortgage may come due at that point.
Non-borrowing spouses may be able to stay in the home
If you have a non-borrowing spouse, they may be eligible to stay in the home and defer payment. This is true under the following conditions:
- They must have been named as a non-borrowing spouse on the loan
- You must have been married when you took out the reverse mortgage and at the time of your death
- The home must be your spouse’s primary residence when you die
If you are in a same-sex marriage but were unable to be legally married when you took out the reverse mortgage, your spouse may be able to stay in the home if you were essentially living as a married couple at that time.
Finally, the HECM loan must not be in default (due to moving out of the home, failing to pay property taxes, or other reasons) at the time of your death in order for your spouse to continue living in the home.
Non-spouse residents will have to repay the loan, refinance, or move out
Anyone who is a non-borrowing spouse who was living in the home with you when you pass away will need to repay the reverse mortgage, refinance it to a forward mortgage, or they will have to move out of the home.
That’s why it’s key that your non-spouse loved ones understand your reverse mortgage and their options if you pass away. If they are unable to pay off or refinance the loan, you want them to have ample time to save money or make plans to move. This may keep them from struggling to find a place to live while also grieving your passing.
Options for your heirs: repay, refinance, or sell
Let’s say you’ve left the home to your children, and they want to keep the home in the family. If they are able, they can pay off the loan in full once it comes due.
However, not everyone will be able to buy a home outright. In that case, your heirs might consider refinancing the reverse mortgage to a “forward” loan. They will have to make monthly payments, but this may give them a more affordable option for keeping the property.
It’s important to talk with your children about their hopes and intentions for the home before you take out a reverse mortgage. Reverse mortgage problems for heirs may arise if they’re unclear about the repayment terms or if you haven’t discussed your goals.
Your kids will need a game plan for the mortgage if they want to keep the home in the family. Will they share the cost of paying it off? Does one child intend to move into the home after you die, and if so, will they be able to take out a forward mortgage to refinance the loan? These are critical questions they’ll need to think about long before your death.
You may find, however, that they do not want to keep the home. If that’s the situation, you can still leave the home to them, and they can sell it to repay the loan and share any remaining profits as you stipulate in your will.
Deed-in-lieu of foreclosure
Should your heirs find themselves unable to repay the loan through other means, they can avoid foreclosure through a deed-in-lieu of foreclosure process. They would turn over the deed to your mortgage lender, and the lender would then take possession of the home and could attempt to sell it to recoup some of their costs.
How does a reverse mortgage work if the home is underwater when I die? Will my heirs be responsible for the difference?
If you’re underwater on your reverse mortgage when you die, meaning that you owe more on the loan than the appraised value of the home, your heirs will not be on the hook for the difference. HECMs are non-recourse loans, which means you — and your heirs — can never owe more than the fair market value of the property.
In the unfortunate event that the reverse mortgage balance exceeds the home’s value when you die, your heirs can sell the property and put the proceeds toward the loan balance. The mortgage insurance on the loan will cover the difference. Note that HUD requires upfront and ongoing FHA mortgage insurance premiums on all HECM loans.
So, in summary, you don’t need to worry about indebting your heirs as long as you took out an FHA-insured reverse mortgage, which most reverse mortgages are.
My parents have a reverse mortgage. What should I know?
If you’re an heir whose parents have a reverse mortgage, figure out how it will work when they die. Work with them now on a will, repayment and property plan. Then, ensure that the right people are on the reverse mortgage loan documents.
For instance, if only one parent is on the loan because the other wasn’t 62 when the reverse mortgage was taken out, make sure the non-borrowing parent is listed as a non-borrowing spouse. That can help them stay in the home without having to immediately repay the mortgage if the borrower dies. The last thing you want is for them to worry about what to do about the reverse mortgage after the death of their partner.
As far as your inheritance goes, think through how you’ll handle repaying the loan. That could mean paying it in full, selling, or refinancing to a traditional forward loan.
Really consider whether you want or will be able to keep the home. Do you plan to move into the home after inheriting it? If not, can you afford the payments and upkeep on an inherited home plus your current home?
Thinking about letting go of your parents’ home, especially if it’s the one you grew up in, can be tough. But it’s important to think through some of these scenarios now so you’re prepared to make decisions when the time comes.
Understanding your options
You may decide to apply for a forward mortgage to keep the home. If so, you’ll need to make sure your credit is strong, you have some savings, and your debt-to-income ratio (DTI) is within a qualifying range. You’ll also need to be able to document the income you’ll use to make payments on that mortgage.
Perhaps you plan to sell the home, but you want to have a few more family get-togethers there while everyone is still together. Knowing that you will sell the home after your parents die can focus your intentions. Maybe you’ll prioritize having the next few holiday celebrations at the home, or you and your siblings will organize a reunion to make some more memories in the house in which you grew up.
Talk to your parents, too, about what they want. Sometimes people make assumptions about sensitive topics, such as property and finances. You may think your parents want you to keep the house in the family. However, they may prefer that you sell it and put the proceeds into college funds for their grandkids.
Or, they may assume you want the house and might avoid using more of their reverse mortgage line of credit to keep the loan balance as low as possible. Meanwhile, you might have every intention of selling it and would prefer that they use whatever money is available to enhance their quality of life.
The point is, talk to your parents now about their goals and yours.
No one wants to think about losing their parents. But starting those difficult conversations now can prepare you for how to navigate weighty emotional and financial decisions when the time comes. Which brings us to our final point.
Parents: Create a will and plan of action
Beyond ensuring that both spouses are named on the loan, you’ll also want to create a will that specifies any agreed-upon intentions for the house.
If you and your children have decided they will sell the house when you and your spouse have passed away, you may have specific ways you want them to spend the money. They might include a family trip, grandkids’ college funds, a down payment for the grandkids to buy their own homes someday.
Or, if you want them to keep the house, detail how it should be divided and used. Is one child receiving ownership of the house? Or will ownership be shared among your children and grandchildren?
The more guidance you can provide your children on what to do with the home, the easier you will make the conversations they must have during the painful time when they are grieving you and trying to put your affairs in order in a way that honors your wishes.
It may even be a good idea to find an estate planner or lawyer who has experience creating wills. They can help you think through the details you may have missed on your own. That way, there’s no question about how your reverse mortgage will work when you die.
How does a reverse mortgage work when you die FAQs
Heirs who inherit homes with reverse mortgage loans must repay the debt when the last borrower has died, either with their own funds, by refinancing to a forward mortgage, or selling the house. If there’s not enough equity in the home to cover the debt, the heirs are not responsible for the shortfall if the reverse mortgage loan was FHA-insured, which most are.
If the owner dies and they’re the last borrower on the loan, the loan becomes due and repayment begins. However, if a significant other survives them and they are listed on the loan as a non-borrowing spouse, they may be eligible to stay in the home and defer repayment of the reverse mortgage loan.
Yes, the reverse mortgage needs to be repaid when the last borrower dies. However, heirs have options when it comes to paying off the debt. They can sell the home, keep the home by refinancing to another mortgage or buying it outright, or sign the home over to the lender in a deed-in-lieu of foreclosure. If the loan was FHA-insured, the heirs are not responsible for any shortfall if the loan balance exceeds the home value.
Know your options
It’s important not only to know how a reverse mortgage works in life, but how to make it work for your loved ones when you die.
Make sure to discuss your plan in detail with other family members to ensure your property is taken care of when you pass away. Don’t leave a reverse mortgage loan behind without a strategy to help your surviving loved ones.