What Happens AFTER the Last
Reverse Mortgage Borrower Passes Away?
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This question is paramount in the mind of many Homeowners that have or are planning to do a Reverse Mortgage on their homes, as well as with their heirs. NONE of the generalized information provided here is to be construed as legal advice, I AM NOT AN ATTORNEY.
For the purpose of this writing, I will refer ONLY to the US Congress created, HUD regulated, FHA Insured "Home Equity Conversion Mortgage" - H.E.C.M. Reverse Mortgage. It is the only one available today and the most numerous one. There were several "propietary" Reverse Mortgages which might have different set of terms and conditions. You should consult with a competent attorney to determine which type you have.
Let's get one thing clear, the HECM Reverse Mortgage was created to help the Senior Homeowner, nobody else. Period. The Borrower owns the property, but Lender has some rights given by the mortgage like in any other type of mortgage. Neither the Lender nor the Government own or want the property. Period.
As a Senior with a HECM Reverse Mortgage on my home, and a Reverse Mortgage Professional Loan Originator since 2005, I can vouch for the fact that it has helped many thousands of Seniors. For MANY, including me, it has been a blessing.
What happens when the LAST Borrower passes away: By the terms of most loans, whether traditional or HECM, at death the loan becomes immediately due and payable. The Borrower no longer exists. Lenders subscribe to services which notify them of the death of a Borrower. The Estate should notify Lender in writing as soon as possible.
Lenders will send a “harsh” letter notifying that the loan is “due and payable” immediately and giving the Estate 30 days to decide how they are going to pay the debt. The Estate must answer within those 30 days and notify their intentions. If no answer is given, Lender will initiate Foreclosure proceedings. Please do not delay in answering.
However, HUD Rules generally allow for a "reasonable" amount of time, not to exceed one (1) year (6 months and maybe UP TO 2 additional 3 months extensions if considered necessary) to pay the debt. In other words, heirs have UP TO a year to pay off the balance due as described above. Heirs must show they are doing "DUE DILLIGENCE" to pay-off the loan (refinancing, Listing for sale with a REALTOR, etc…). During that time, the estate should communicate and cooperate constantly with the Loan Servicer and seek their help and guidance. Most will try to help you if you do.
If balance due is not paid within the time allowed (up to 1 year) the Lender will initiate Foreclosure action and the property could be lost. If the estate does not cooperate and communicate, Lender does not have to wait UP TO one year to initiate the foreclosure action.
Normally, any monthly advances that the LAST Borrower was receiving will stop or any unused Creditline funds will cease to be available. Consult with the Loan Servicer that sends the monthly Statements.
Please note that interest, Mortgage Insurance premiums, and service fees (if any) continue to accrue until the loan is paid in full. Property Taxes, insurance, and maintenance fees (if any) must be paid during this period and the property maintained in good condition to avoid causing initiation of foreclosure proceedings. The Estate might be able to use a Tax Deduction for interest charges paid when the loan is paid off completely.
Now, the HECM Reverse Mortgage is a Non-Recourse loan. In simple terms it means that the Lender (Mortgagee) CAN NOT collect one penny more than "the lesser of the balance due or the value of the home", either from the Borrower in life, or from the Estate. Not a penny more.
Let’s see some examples to make this clear.
Example 1): Property Sold or refinanced or loan paid off.
Home Value: $300,000
Loan Balance due: $200,000
Remaining Equity: $100,000 This Equity belongs to Homeowner in life or to estate.
Example 2): Property "UNDERWATER"
Home Value: $300,000
Loan Balance due: $350,000
Shortfall: ($ 50,000) This amount can not be recovered from Borrower or from Estate.
The Homeowner paid a FHA required Mortgage Insurance Premium (MIP) at closing and monthly. The Mortgage Insurance compensates the Lender for this shortfall once the property is foreclosed and sold, sold in a Short Sale, or "given" to the Lender In a "deed-in-lieu-of-foreclosure" arrangement and sold. The Lender can not, repeat, CAN NOT, recover this amount from the Borrower or the heirs.
The amount owed, will depend on several factors:
(1) how many years ago the Reverse Mortgage was done.
(2) the amount of loan proceeds advanced to the Borrower.
(3) Plan chosen and Interest Rate of the loan.
The increase or decrease in value of the property does not affect the balance due. However, it does affects whether the balance due will be smaller or greater than the value of the home.
If the value of the Property is less than the balance due on the loan, the property might be sold in a "Arms Length Transaction" to a Non-Related buyer for the Lesser Of the Mortgage Balance or 95% of the Appraised Value. Heirs might be able to keep the property by paying the Lesser of the Mortgage Balance or 95% of the Appraised Value.
Spousal Rights (Non-Borrowing spouses): If a surviving non-borrowing spouse was removed from Title due to being younger than 62 years of age, or any other reason, at time of closing, there are very complicated rules, depending on the date of closing. Surviving Spouses and heirs should consult a competent attorney to interpret their Rights and options.
It is important to know whether the Loan closed before or after August 4th, 2014 as on that date, Rules changed and, depending on the closing date, different Rules may apply to the Non-Borrowing Spouse. As of May 6, 2021 HUD favorably changed the Rules. To view the Official Document CLICK HERE 2021-11hsgml.pdf (hud.gov)
Non-Borrowing Occupant: Please be aware that any non-borrowing occupant MUST vacate the property opportunely. Tenants living the property might have certain rights and protections under State Law and may need to consult competent legal counsel.
I have tried to simplify the process to make it easier to understand. I sincerely hope that it is helpful. Again, this should not be construed to be legal advice, I am not an Attorney. If you have any questions, you should consult competent legal counsel.
Note: The information herein provided is for informational purposes only and It is subject to error and/or omissions and to change without prior notice.