What Happens With a Reverse Mortgage After Death?
Reverse mortgages are a financial product that many homeowners consider as they age, providing an opportunity to tap into their home equity without having to sell or move out.
While taking out a reverse mortgage can be beneficial for homeowners who are struggling financially, it can create complications for the homeowner’s heirs after their death. That’s because heirs who inherit a home with a reverse mortgage don’t just inherit the property. They also inherit the responsibility to pay back the loan.
At Russell Manning Attorney, I help homeowners accomplish their estate planning goals if they have a reverse mortgage (or are considering one) and the heirs of those who passed away with a reverse mortgage on their property. My law offices are based in Corpus Christi, Texas, but I serve clients throughout the Coastal Bend Area and South Texas.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan available to homeowners who are typically 62 years or older, allowing them to borrow money from their home equity and convert it into cash. A reverse mortgage is the opposite of a traditional mortgage (hence the name) because it is the lender who pays the homeowner, not the other way around. However, the loan must be repaid when the home is sold or the borrower moves out permanently or passes away.
Here are some of the key features of a reverse mortgage:
Eligibility. Only homeowners aged 62 or older are eligible.
Payment options. Lump sum, monthly payments, line of credit, or a combination.
Repayment. The loan must be repaid when the borrower dies, moves out, or sells the home.
Almost all reverse mortgages in the United States are home equity conversion mortgages (HECMs) that are available to homeowners through lenders approved by the Federal Housing Administration (FHA).
How a Reverse Mortgage Affects a Spouse or Partner if They Are a Co-Borrower
If the surviving spouse or partner is a co-borrower on the reverse mortgage, the situation after the borrower’s death is generally more straightforward. As a co-borrower, the surviving spouse or partner has equal rights and responsibilities regarding the loan:
Continued residency. The surviving co-borrower can continue living in the home without having to repay the loan immediately. The reverse mortgage will only become due when the last surviving co-borrower dies, sells the home, or moves out permanently.
Access to funds. The surviving co-borrower will continue to have access to any remaining funds from the reverse mortgage, according to the original terms.
Responsibility. The co-borrower must continue to meet the obligations of the loan, such as paying property taxes, homeowners insurance, and maintaining the home.
When a borrower with a reverse mortgage passes away and you are the surviving co-borrower, you must notify the lender of the borrower’s death as soon as possible. This will initiate the process of determining the loan's status and next steps.
How a Reverse Mortgage Affects a Spouse or Partner if They Aren't a Co-Borrower
The situation becomes more complicated if a spouse or partner is not a co-borrower on the reverse mortgage. In this case, the surviving spouse or partner may face different challenges and options.
Upon the death of the borrower, the reverse mortgage becomes due and payable as long as there is no other surviving co-borrower. This means the loan must be repaid, usually within one to six months, although extensions may be possible. The surviving spouse or partner may have several options for repaying the loan:
Sell the home. When the sale is complete, the spouse or partner can use the proceeds to pay back the reverse mortgage. Any remaining equity after repayment belongs to the surviving spouse or partner.
Refinance. If eligible, the surviving spouse or partner can refinance the reverse mortgage into a traditional mortgage or a new reverse mortgage in their name.
Pay off the loan. If available, the surviving spouse or partner can use other assets to pay off the reverse mortgage balance.
If the surviving spouse or partner is not on the title, heirs (such as children) may also have the option to repay the loan and keep the home. Some reverse mortgages include provisions to protect non-borrowing spouses, allowing them to remain in the home after the borrower's death. These protections vary by loan type and lender, so if your spouse or partner died with a reverse mortgage you might want to have an attorney review the specific terms of the mortgage.
Tips for Homeowners with Reverse Mortgages
If you have a reverse mortgage or are considering one, here are some tips to help ensure it aligns with your long-term goals:
Communicate with your family. Many homeowners who decide to take out a reverse mortgage do not talk to their family members about this. In many cases, family members and heirs know nothing about a reverse mortgage until after the homeowner’s death. If you, as a homeowner, properly communicate your decision to obtain a reverse mortgage, you can prevent confusion and conflicts in the long run.
Appoint someone you trust as the executor. The appointment of an executor for your estate is a vital step regardless of whether you have a reverse mortgage or not. If you do, the executor will be responsible for managing the repayment process and communicating with the lender.
Keep your records organized. The best thing you can do is maintain organized records of your reverse mortgage documents, including statements, agreements, and contact information for the lender. This will make it easier for your heirs to understand the terms of the reverse mortgage and manage the repayment process.
Consult with an attorney. Having a reverse mortgage can lead to certain difficulties for your estate plan. That is why you might want to seek the guidance of an attorney when taking out a reverse mortgage or setting up an estate plan with a reverse mortgage. Your attorney will help ensure that your reverse mortgage doesn’t pose a risk to your home ownership, nor does it create headaches for your heirs in the unfortunate event of your death.
If you are a homeowner who has concerns regarding a reverse mortgage in connection with estate planning, you might want to get the assistance of an attorney.
Discuss Your Situation with an Attorney
As an estate planning attorney, I understand how a reverse mortgage can be incorporated into an estate plan and how it affects heirs when a homeowner passes away. If you are a homeowner considering taking out a reverse mortgage on your home, I can help.
At Russell Manning Attorney, I also assist those who inherit a home with a reverse mortgage and need help figuring out what to do during a time of grief. Call my office today to schedule a case evaluation.