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Home Equity Conversion Mortgages (HECM), also known as reverse mortgages, are an attractive tool for retirees looking to secure their financial future. Repayment of the loan is deferred so long as the homeowner, or non-borrowing spouse is alive, uses the home as their primary residence, pays relevant property taxes, insures the home, and maintains it in good condition. But what happens when the last surviving homeowner borrower passes?

Who Owns the Home

Homeowners can choose who owns their property when they pass, most often through a will.  If the homeowners have not created a legal plan for the home, there are laws that decide who will receive “the estate” when the owners pass. This is no different when a homeowner has a reverse mortgage.  

Of course, when it comes to a Reverse Mortgage or HECM, it is most helpful for the heirs to have relevant information about the loan even before the passing of the borrower. Once the last surviving borrower passes, the reverse mortgage becomes due. This requires the heirs to make some decisions. When an heir inherits a home, it is subject to any debt or mortgages on the home. This is true with all mortgages, not just reverse mortgages. 

One difference with a reverse mortgage, it is a non-recourse mortgage, which means that the debt is only secured by the house and would not need to be paid back using any assets other than the home. So the heirs do not need to worry about owing additional money to the bank or protecting the estate’s other assets from the reverse mortgage debt on the home. 

The first question to ask: Is there an eligible non-borrowing spouse in the home that can obtain a loan repayment deferral, allowing them to stay in the home? Next, is there equity in the home? Do the heirs want to keep the home, sell the home, or if there is no remaining equity, they may choose to sign the home back to the lender or bank.

How to Pay a Reverse Mortgage

There are several ways to settle a loan balance. Being prepared and acting quickly means avoiding unnecessary fees and foreclosure actions by the lender. Heirs should give serious thought to each of these options ahead of time if possible:

  • A cash payment of the loan balance will end the reverse mortgage and release the lien on the property. 

  • In some cases, the debt may equal or exceed the value of the home. Heirs will have the unique option of purchasing the property for 95 percent of the home’s appraised value rather than paying off a higher loan balance.

  • Heirs may also decide to refinance the existing balance to keep the home, and pay back the borrowed funds over time by using a standard mortgage. 

  • The home can be sold and the proceeds used to settle the balance with the heirs receiving any remaining proceeds from the home.

  • Heirs can sign the deed back to the bank or lender, allowing the lender to ultimately sell the home. 

Communication is Key

When a reverse mortgage is obtained it is critical that an up-to-date will is in place. Without a clear heir, legal decisions will be stalled and complications can result. Borrowers may also want to seek legal advice in advance to consider other options to hold title on your home, such as a life estate, a trust, or adding another person to the title. Make sure heirs know you have a reverse mortgage, who your lender is, and where you keep your paperwork. 

Heirs should communicate with the lender as soon as possible after the passing of the homeowner. Review your options, discuss your plains, and get clear on the time frames.  If there is a non-borrower spouse, confirm the rules and requirements for a deferment of loan payment. Without a borrower remaining alive and in the home, no additional funds will be advanced on the reverse mortgage, so ask for documentation that clarifies your responsibilities, and keep copies of any paperwork provided.   

We at Open Mortgage are available to assist in all of your home financing needs. This includes further discussing how and when to take out a reverse mortgage or going over loan terms to ensure that both borrowers and heirs are properly prepared. Browse our website today for more information and to start talking to an experienced loan officer.

Things to know about Reverse Mortgages:
  • At the conclusion of a reverse mortgage, the borrower must repay the loan and may have to sell the home or repay the loan from other proceeds
  • Charges will be assessed with the loan, including an origination fee, closing costs, mortgage insurance premiums and servicing fees
  • The loan balance grows over time and interest is charged on the outstanding balance
  • The borrower remains responsible for property taxes, hazard insurance, and home maintenance, and failure to pay these amounts may result in the loss of the home
  • Interest on a reverse mortgage is not tax-deductible until the borrower makes partial or full re-payment
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