Reverse Mortgage at Death?

reverse mortgage at death
What happens with a Reverse Mortgage at Death?

This question often comes up when we are discussing the ins and outs of Reverse Mortgage Loans with potential borrowers.

There seems to be a lot confusion surrounding what happens with a home that is secured by a reverse mortgage at death. Here is how it works.

HERE’S WHAT HAPPENS WHEN THE BORROWER DIES?

If the borrower/homeowner left the home to heirs as part of an overall estate, the heirs have the choice to either keep the home or sell the home.

Having a reverse mortgage in this situation, is no different than if the homeowner had a traditional “forward” mortgage on the home at the time of death. In either scenario, the heirs would have to decide how to pay off the existing mortgage.

They could either refinance the existing mortgage with a new mortgage in their own name and keep the home. Or if they have their own assets and don’t need a new mortgage, they can simply pay off the existing mortgage with their own money and keep the home.

If the heirs do not want to keep the home, they can sell it and pay off the existing mortgage with the proceeds from the sale.

If the home sells for more than what is owed on the mortgage the heirs keep the excess proceeds from the sale.

Now, here is the part where a reverse mortgage is different than a traditional “forward” mortgage:

Let’s assume that due to the decline in home values of late, the home is “underwater” at the time of death, meaning that the reverse mortgage balance is higher than the market value of the home.

If the home cannot be sold for at least the balance of the reverse mortgage, the FHA Mortgage Insurance Fund pays the lender whatever the shortfall amount is at the time of sale. In this situation, the heirs would not really have the option to keep the home if they needed to get a new mortgage on it, because there wouldn’t be a lender that would give the heirs a loan that is greater than the value of the home.

A couple of questions that usually come up at this point in the discussion are; who is responsible for selling the home, and who owns the home, especially if the home is worth less than the reverse mortgage balance?

A lot of people are under the misconception that when a borrower passes away and has a reverse mortgage on their home, that the bank owns their home.

THIS IS NOT THE CASE. The bank does NOT own the home, the heirs/estate of the deceased, own the home. At the time of death, the bank usually gets an appraisal for the property so they know what to expect in the way of a loan pay off from the sale or refinance proceeds.

If the heirs do not actively attempt to either refinance the existing mortgage or sell the property, the lender has the right to foreclose, re-market the property and satisfy their mortgage from the foreclosure sale proceeds.

The lender has no ability to file a deficiency judgement against the heirs if the foreclosure proceeds are less than the existing loan balance.

FHA Reverse Mortgage Loans (HECM) are Non-Recourse loans, meaning that the home stands alone for the debt….not the estate, not the heirs…. just the home.

Since HECM loans are non-recourse, sometimes we get questions about selling the home to family or friends for less than the market value. This isn’t really possible, because as mentioned earlier, the lender will have an appraisal for the home and will require that the house is marketed at the present value or close to the current market value. Otherwise the lender still has the option to foreclose to recover as much as possible of the loan balance through a foreclosure sale.

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