The death of a borrower is one of the maturity events that leads to a reverse mortgage becoming due. And when both spouses are borrowers to that loan, it’s when the last surviving spouse dies that triggers repayment of the loan. If your parents have a reverse mortgage to their name, here’s what you need to know about the loan upon their death.
Not Responsible for Repayment
Being an heir to your parents, you are not responsible for the repayment of the loan except when you have to sell the home. Indeed, selling the home is not only the option as shown below.
However you opt to act, you are required to notify the servicer when the last parent borrower dies. It’s important to remain in constant communication with the mortgage servicer so you can deal with the mortgage properly.
Upon the servicer sending out a due and payable letter, you are given six months to settle the loan obligation. You may request for further extensions subject to approval by the proper parties.
Here are possible actions you can take toward the timely repayment of the reverse mortgage debt.
- Pay off the loan
- Sell the home
- Refinance the loan
- Deed the property
If you wish to stay in your family home, you can pay back the reverse mortgage or purchase the home at 95% of the value of the property.
It’s important for you to pay off the loan without delay to avoid incurring further interest charges and mortgage insurance premiums (MIPs) on FHA HECMs that could eat at the home’s equity.
Only when you have fully repaid the loan will the lender release the lien on the property and thus inherit the home debt-free.
Selling the Home
You or the executor of the estate sells the home to repay the loan. The sales proceeds would go toward the satisfaction of the loan first and any remaining proceeds will be divided among the heirs.
Thankfully, reverse mortgages are nonrecourse loans so even when the home sells for less than the outstanding loan balance, the lender cannot collect more than what the home’s worth.
The difference or shortfall will be covered by the FHA through the mortgage insurance on the reverse mortgage.
Instead of paying off the loan, you can choose to refinance the reverse mortgage and be able to stay in the home. This option can be complex as not all lenders offer reverse mortgages.
In some instances, you apply for a short-term loan so you can refinance the original reverse mortgage, which you have to assume from the original borrower/s. The problem with this is that reverse mortgages are not assumable.
Still, it would not hurt to ask the mortgage servicer about the possibility of a refinance so you can keep the home.
Deed the Property
This may be your last resort. It involves signing a deed in lieu of foreclosure whereby you release all your interest in the home to the mortgage lender in order to satisfy the outstanding reverse mortgage debt and avoid foreclosure.
In situations where you have no desire to keep or sell the property because its mortgage is underwater, you may opt to sign this paper and hand the home over to your lender.
Indeed, equity plays a role in your ultimate decision. Should you sell the home or keep it?