What Happens With a Reverse Mortgage After Death?
Many of us have no doubt seen ads on TV touting the benefits of reverse mortgages for seniors. A reverse mortgage taps into the equity in one’s home to provide either a lump sum, a monthly payment, or a line of credit—thus, you’re paid instead of having to pay the lender.
However, the payments you receive will become “due and payable” when you and your co-borrower pass on. Then your heirs are left with what might be a few difficult choices on what to do to satisfy the lender’s reverse balance.
Reverse mortgages are available in different versions. Those that are backed by the Federal Housing Administration (FHA) generally offer the most protection and are known as Home Equity Conversion Mortgages (HECMs). Those with older or non-HECM reverse mortgages may face somewhat stricter repayment guidelines.
If you are a spouse or heir to a loved one with a reverse mortgage who has passed away, leaving the status of their home and mortgage obligations in limbo in or around Los Angeles, California, contact the Law Office of Rodney Gould. As an experienced lawyer, Rodney Gould is an estate administration and probate attorney who can help you navigate the necessary steps to satisfy any reverse mortgage obligations. He also proudly serves clients in neighboring communities such as Sherman Oaks, Studio City, West Hollywood, and Beverly Hills. Set up a one-on-one consultation today.
Types of Reverse Mortgages
Californians love reverse mortgages, leading the nation in embracing them. In 2020, Los Angeles County homeowners applied for 3,068 reverse mortgages, according to the American Advisors Group (AAG), which bills itself as “the nation’s leader in home equity solutions.” In contrast to L.A. County, Miami-Dade in the same year had only 519 applications, and the whole state of Texas had only 3,014.
Prior to 2014, when the Reverse Mortgage Stability Act took effect, reverse mortgages were less consumer-friendly. Much recent activity in the market stems from the protections now offered with Home Equity Conversion Mortgages backed by the FHA.
Your loved one, however, may have obtained a reverse mortgage prior to the availability of HECMs or decided to go with a different type of reverse mortgage. Thus, you as a spouse or heir may face somewhat stiffer requirements and repayment options.
Under a HECM loan, a co-borrowing spouse can remain in the home until he or she passes away—but of course, the reverse balance of payments will continue to accumulate and will become due and payable at some point to heirs.
A non-borrowing spouse can also remain in the home without the balance becoming due if certain conditions are met. In any case, both or either spouse can postpone the payable due date only if they continue to occupy the residence. If both spouses or the sole remaining spouse end up in nursing homes, the mortgage becomes immediately due.
Repaying a Reverse Mortgage
Heirs to a HECM mortgage will receive a condolence letter from the FHA-backed lender within 30 days of the death of the last remaining spouse. They will then have six months to pay the balance, but they can request two 90-day extensions. There are essentially four options for paying the balance:
Use your own funds to meet the obligation
Refinance the property with a traditional mortgage
Sell the residence to cover the balance
Walk away and give the residence to the lender
FHA-backed loans are called non-recourse, meaning that heirs cannot have their assets seized or have liens placed on their property to satisfy the reverse obligation. In fact, they are obligated only to repay 95% of the value of the home or the outstanding balance, whichever is less. If the home sells for less than what is owed, heirs do not have to make up the balance. On the plus side, if the sale of the home exceeds what’s due to the lender, heirs can retain the difference.
A pre- or non-HECM lender will likewise track death certificates and when one borrower passes away, the mortgage company will send a due-and-payable notice to the estate. Heirs are required to obtain an appraisal of the home no later than 30 days after receiving the due-and-payable notice unless there is a surviving co-borrower or non-co-borrower who qualifies under HUD rules, in which case they can apply for a deferral.
If there is no deferral, the lender at the six-month period expects the heirs to make clear their options: pay with their own funds, refinance, sell, or turn over the property. At six months, the lender can commence foreclosure proceedings if the heirs don’t act decisively.
Ultimately, it’s vital to work with an attorney who can help you navigate these complex processes.
Seek the Answers You Need
If you as a spouse or heir are facing a potential reverse loan obligation—or need help in obtaining a deferral or extension—reach out to the Law Office of Rodney Gould. Contact the Los Angeles firm immediately to get started.