When the owner of a home with a reverse mortgage dies, the heirs are on the hook for the full loan balance and any interest that’s accrued over the life of the loan term. The lender will expect a quick repayment regardless of whether the beneficiary plans to live in the home or not.
Understanding Reverse Mortgages
A reverse mortgage is an insured loan that gives homeowners age 62 and older the ability to receive cash payments by converting the equity they’ve built in the property into tax-free loans, which can be received in monthly installments, one-time lump sum payments, or through a line of credit. The borrower isn’t required to make monthly payments toward the loan balance but is obliged to continue paying homeowners insurance and property taxes.
What Happens After Death
The reverse mortgage becomes due and payable upon the last borrower’s death. The heirs will receive a Condolence Letter from the loan servicer informing them about the status of the borrower’s estate, the applicable rules, and the expected outcome. The interest continues accruing and the heirs have to decide how they will satisfy the loan. Available options include:
- Pay the loan balance in full
- Put the home on the market. Heirs manage the sale and keep all remaining equity after the loan is paid
- Complete a deed titling the property back to the lender
- Walk away from the property. This would result in the servicer taking a foreclosure action
Reverse mortgages are non-recourse loans. If the property will not sell for enough to repay the entire amount or the loan balance exceeds the value of the home, a lender cannot go after the rest of the estate and the heirs are not liable for any additional amounts owed.
Timeline for Paying Off the Loan
Time frames vary depending on communications between the heirs and the servicer and the efforts made to refinance or sell the home. Typically, the heirs have up to one year from the date of the borrower’s death to pay off the loan. If they fail to communicate, repay the loan, or deed the property to the servicer within the set amount of time, the servicer has a legal right to begin foreclosure proceedings.