A reverse mortgage can provide financial relief to seniors looking to supplement their income. You’ll get cash to use however you see fit without having to make monthly mortgage payments. However, the loan must be paid in full when you pass away if your spouse, heirs or other relatives wish to keep it.
Read on to learn more about what happens when reverse mortgage borrowers die.
How Reverse Mortgages Typically Work
When you take out a traditional mortgage, you’ll make monthly principal and interest payments for a set period until the loan is paid off – typically 10, 15, 20 or 30 years. But a reverse mortgage doesn’t quite work this way.
It allows you to tap into your home equity, but you won’t make payments to the lender like you would with a home equity loan or home equity line of credit (HELOC). Instead, the lender will pay off your current mortgage and disburse the remaining equity to you through monthly payments (until you die or for a specific period of time), a lump sum payment or a line of credit that grows over time.
Reverse mortgages are quite beneficial to seniors for many reasons. You can supplement your retirement income, and you won’t have to make monthly mortgage payments. Plus, you get to keep your home, which is another plus if you want to stay put and have no plans to relocate anytime soon. Another significant perk is the freedom to use the reverse mortgage payments however you’d like to – many personal loan products don’t give you this luxury, and you’ll be on the hook for principal and interest payments for at least a few years, if not longer.
However, you must use the home as your primary residence and cover the costs of maintenance and repairs out of pocket. You’ll also be responsible for paying homeownership insurance, property taxes, HOA fees and CDD fees (if applicable). Otherwise, you put your home at risk of foreclosure for failing to abide by these conditions. You should also be aware that reverse mortgage payments can sometimes affect the benefits you receive if you participate in a need-based government program, like Supplemental Security Income (SSI). In some instances, you’ll get less than you were before taking out the reverse mortgage and receiving payments.
How Are Co-Borrowers Affected by Reverse Mortgages?
If the spouse or relative is a co-borrower, the reverse mortgage doesn’t become payable until they pass away or move out of the property. The same rule applies if the co-borrower precedes you in death – the lender will not demand repayment of the reverse mortgage until you pass away or relocate.
How Are Spouses and Relatives Affected by Reverse Mortgages?
It depends on if they’re a co-borrower or non-borrower. If they’re a co-borrower, the rules mentioned in the previous section apply. But if they aren’t co-borrowers, the outstanding balance becomes payable when you pass away or move.
An exception to the rule applies if you closed on a reverse mortgage before August 4, 2014. In this case, a spouse who isn’t a co-borrower may have the ability to stay put without repaying the loan through what’s referred to as a Mortgagee Optional (MOE) Assignment. This arrangement involves an annual certification performed by the lender to confirm the non-borrowing spouse was legally married to the borrower when they took out the reverse mortgage and when they passed away, along with the following:
- The non-borrowing spouse has a valid Social Security number and is willing to provide it. (A Tax Identification Number may suffice in some cases).
- The non-borrowing spouse is using the property as a primary residence and complying with the loan’s obligations.
- The non-borrowing spouse is no longer receiving loan proceeds.
If the reverse mortgage was originated after August 14, 2014, non-borrowing spouses aren’t required to vacate the property at the time of the borrower’s death if:
- They were legally married to the borrower when the loan was originated, and their name was noted in the mortgage documents.
- They resided in the home and used it as their primary residence at the time the borrower applied for the reverse mortgage.
What Happens to a House If an Owner Dies with a Reverse Mortgage?
If you pass away with a reverse mortgage, the balance must be paid in full unless a co-borrower will remain in the home and abide by the loan obligations. Otherwise, the payoff can be done in one of the following ways:
- Sell the home: If your home is worth more than you owe on the reverse mortgage, your heirs have the right to sell the property and use the sales proceeds to pay off the balance. The remaining profits are theirs to keep, along with the home. (If the opposite is true, your heirs still have the right to the home if they agree to pay 95 percent of its market value).
- Get a new mortgage or pay cash: Your heir also has the option to take out a mortgage or pay cash for the property to keep it.
- Refinance forward: The co-borrower can also refinance into a new mortgage if they wish to move to another property but keep the current one as a rental.
- Provide a deed in lieu of foreclosure: If your heirs inherit the property and it’s worth less than the mortgage balance, they can provide a deed in lieu of foreclosure to steer clear of the legal fees associated with foreclosure proceedings. Doing so will not impact your heirs’ credit score.
Do Heirs Have to Pay Back the Reverse Mortgage?
If an heir is not a co-borrower on the reverse mortgage but wants to get possession of the property when you pass away, they will have to pay off the balance.
Can You Transfer a Reverse Mortgage to Someone Else?
Reverse mortgages are not assumable. This means they cannot be transferred to another party.
How to Get a Reverse Mortgage
Getting a reverse mortgage can be a significant financial decision, and it’s crucial to understand the process before moving forward. Here are the steps you can follow to obtain a reverse mortgage:
- Educate Yourself: Start by educating yourself about reverse mortgages and how they work. Take the time to research the benefits, potential risks, and eligibility requirements associated with this type of loan.
- Research Lenders: Look for reputable lenders specializing in reverse mortgages. Consider factors such as their experience, customer reviews, and accreditation. During your search, be sure to consider Top Flite Financial. As a leading originator of Home Equity Conversion Mortgages (HECM) backed by the federal government, Top Flite Financial is a trusted choice for reverse mortgages.
As a leading originator of Home Equity Conversion Mortgages (HECM) backed by the federal government, Top Flite Financial is a trusted choice for reverse mortgages. Complete the online form to request a free consultation with a Top Flite reverse mortgage expert. - Consultation: During the consultation, a reverse mortgage expert will assess your specific financial situation and goals. They will answer any questions you may have and provide personalized guidance tailored to your needs.
- Application Submission: After discussing your financial situation and goals with your reverse mortgage expert, they will guide you through the application process. You will need to provide necessary documentation, such as proof of income, identification, and property information.
- Appraisal and Underwriting: A professional appraiser will assess the value of your home to determine its worth for the reverse mortgage loan. Once the appraisal is complete, your application will be reviewed by an underwriter who will evaluate your eligibility and ensure all necessary requirements are met.
- Closing: If your application is approved, you will proceed to the closing stage. At this point, you will sign the necessary paperwork and finalize the terms of your reverse mortgage.
- Loan Disbursement and Repayment: After closing, the funds from your reverse mortgage will be disbursed to you. You can choose to receive the funds in a lump sum, as monthly payments, or as a line of credit.
Again, with a reverse mortgage, repayment is not required if you continue to meet certain obligations, such as maintaining the property and paying property taxes and insurance. The loan will be repaid when you sell the home, move out, or pass away. At that time, the loan balance plus accrued interest will need to be paid off. If there is any remaining equity in the home after repayment, it will go to you or your heirs.
