What Happens With a Reverse Mortgage After Death?
Feb. 12, 2024
Upon the death of a homeowner, a reverse mortgage (a financial tool designed for elderly individuals to tap into their home equity without selling) presents a significant question for the heirs: what happens next? It's important that relatives understand the processes and options available to those faced with handling a property linked to a reverse mortgage.
Heirs' Options and Responsibilities
When a homeowner with a reverse mortgage passes away, their heirs are presented with several decisions and duties:
Repay the Loan Balance: Heirs can opt to settle the loan debt and retain ownership of the home.
Property Sale: Another option is to sell the property and use the proceeds to pay off the reverse mortgage.
Allow Lender to Acquire the Property: If the property's value does not exceed the loan balance, heirs can permit the lender to take possession—often referred to as 'deed in lieu of foreclosure'.
Heirs must communicate their decision to the lender typically within 30 days of the homeowner's passing and may have up to six months to secure financing if they wish to keep the property. It is vital that heirs understand these timelines and proceed with diligence to ensure their rights and the estate's interests are adequately protected.
Understanding Reverse Mortgages
A reverse mortgage is a type of home loan that allows homeowners 62 years or older to convert a portion of their home equity into cash. This can provide a valuable financial resource for those who need it, but it's important to understand how it operates.
Reverse mortgages differ from traditional home loans. For one, the homeowner doesn't have to make any loan payments. Instead, the loan is repaid when the homeowner no longer lives in the home. This usually happens when the homeowner sells the home, moves out permanently, or passes away.
How Is It Repaid?
Repayment of a reverse mortgage happens when the last surviving borrower leaves the home permanently, sells the home, or passes away. At that point, the loan balance, including the borrowed amounts, accrued interest, and mortgage insurance premiums, becomes due.
What Is It? Who Needs Them?
A reverse mortgage might be a good choice for individuals who are "house-rich but cash-poor." This typically refers to older adults who may have paid off their home or have a small remaining mortgage balance, but have limited income. By taking out a reverse mortgage, they can tap into the equity they've built in their home and use it for living expenses, healthcare costs, or anything else they choose.
However, it's crucial to be aware of the implications of a reverse mortgage. While it can provide financial relief, it also decreases the homeowner's equity in the home and increases the loan balance over time.
Reverse Mortgage Insurance
One aspect of reverse mortgages that provides peace of mind is mandatory mortgage insurance. This insurance protects both the borrower and the lender. If the loan balance becomes higher than the home's value, the insurance will cover the difference, ensuring that neither the borrower nor their heirs are on the hook for a loss.
In cases where the deceased had reverse mortgage insurance, relatives have a degree of protection. This insurance ensures that if the home's value is less than the balance of the reverse mortgage at the time of the homeowner's death, relatives are not personally liable to cover the shortfall. Their options include:
Filing an insurance claim: Relatives can file a claim with the insurance provider to cover the difference between the home's value and the loan balance.
Selling the home: If they opt to sell the property and the sale proceeds are inadequate to pay off the reverse mortgage, the insurance would kick in to cover the deficit.
Deed in lieu of foreclosure: In a scenario where the property's market value has fallen and relatives prefer not to keep the home, a 'deed in lieu of foreclosure' can be arranged with the lender, with the mortgage insurance covering the remaining loan balance.
Relatives should contact the reverse mortgage provider promptly to discuss these options and ensure that the insurance benefits are utilized effectively to settle the affairs of the estate.
Guiding You Through the Process
At the Law Office of Corey J. Rossi, we want to assure you that you're not alone in this process. We're here to provide legal support to our clients in Tonawanda, Amherst, Wheatfield, and throughout Erie County and Niagara County. We understand that dealing with financial matters during a time of loss can be challenging, but know that it's our job to help ease that burden. We'll assist you in understanding your rights, responsibilities, and options when it comes to settling a reverse mortgage and residential real estate. Don't hesitate to reach out to our attorneys for a consultation. Let's work together to find the best solution tailored to your unique situation.