Understanding Reverse Mortgages and Their Maturity
A reverse mortgage is a type of loan that allows homeowners, typically 62 or older, to convert part of the equity in their home into cash. Unlike a traditional mortgage, where the homeowner makes monthly payments to the lender, with a reverse mortgage, the lender makes payments to the homeowner (or the homeowner takes a lump sum or line of credit). The loan balance grows over time as interest accrues and funds are advanced, becoming due and payable when the last borrower leaves the home permanently (e.g., sells the home, moves to a nursing home, or passes away).
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA). HECMs have specific regulations regarding how they are handled upon maturity, which directly impacts whether a family member can "take over" the loan.
When Does a Reverse Mortgage Become Due and Payable?
A reverse mortgage becomes due and payable under several circumstances:
- The borrower sells the home.
- The home is no longer the borrower's primary residence. This includes moving into a nursing home or assisted living facility for more than 12 consecutive months.
- The last surviving borrower passes away.
- The borrower defaults on loan terms. This could include failing to pay property taxes, homeowner's insurance, or maintain the home.
Can a Family Member Take Over a Reverse Mortgage? The Role of an Eligible Non-Borrowing Spouse
For many years, if a reverse mortgage borrower passed away and their spouse was not also a borrower on the loan (an 'eligible non-borrowing spouse'), the loan became due, forcing the surviving spouse to either pay off the loan or sell the home. However, rules changed following the Housing and Economic Recovery Act of 2008 and subsequent FHA guidance, most notably Mortgagee Letter 2015-15.
Under current HECM rules, an eligible non-borrowing spouse can remain in the home after the borrower's death without having to immediately repay the reverse mortgage. To qualify, the spouse must meet specific criteria:
- They must have been married to the borrower at the time the HECM was originated and remained married.
- They must be named in the reverse mortgage documents as an eligible non-borrowing spouse.
- They must have occupied, and continue to occupy, the property as their principal residence.
- They must meet all other reverse mortgage obligations (e.g., pay property taxes, homeowner's insurance, maintain the home).
If these conditions are met, the eligible non-borrowing spouse can defer the loan's due and payable status. The loan continues to accrue interest, and funds cannot be drawn, but the spouse can remain in the home. Upon the death or departure of the eligible non-borrowing spouse, the loan will then become due and payable.
Options for Heirs (Non-Borrowing Spouses and Other Family Members)
For all other family members and non-eligible non-borrowing spouses, the loan generally becomes due and payable upon the maturity event (e.g., borrower's death). In this scenario, heirs typically have a few primary options to address the reverse mortgage debt:
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Repay the Reverse Mortgage: Heirs can choose to keep the home by paying off the reverse mortgage balance. A key feature of HECM loans is that the amount due cannot exceed the home's appraised value, even if the loan balance is higher. This is known as the "Non-Recourse" feature. Heirs would pay the lesser of the outstanding loan balance or 95% of the home's appraised value. This repayment can be financed through a new mortgage, other funds, or by selling other assets.
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Sell the Home: The most common option is to sell the home. The proceeds from the sale are first used to pay off the reverse mortgage. If the sale price is less than the loan balance, the FHA insurance covers the difference, provided it's a HECM loan. If the sale price is more than the loan balance, the remaining equity goes to the heirs.
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Deed the Home to the Lender: If the heirs do not wish to keep the home and the sale proceeds would not cover the loan amount (or they prefer not to manage the sale), they can choose to deed the home back to the lender. This absolves them of the reverse mortgage debt, and they receive no proceeds from the property.
Comparison of Options for Heirs
| Feature | Repay Reverse Mortgage | Sell the Home | Deed Home to Lender |
|---|---|---|---|
| Goal | Keep the property | Generate proceeds, pay debt | Avoid debt, relinquish property |
| Cost to Heirs | Amount due (lesser of balance or 95% appraised value) | Potential selling costs (commissions, closing costs) | Generally none (unless taxes, insurance unpaid) |
| Equity/Proceeds | Retain all remaining equity | Keep any proceeds exceeding loan payoff | None |
| Timeline | Must be completed within specified timeframe (typically 6-12 months) | Must be completed within specified timeframe (typically 6-12 months) | Faster resolution, avoids selling process |
| Ownership | Heirs become full owners | Heirs manage sale, transfer ownership to buyer | Ownership transferred to lender |
| Recourse Protection | Protected by non-recourse clause (if HECM) | Protected by non-recourse clause (if HECM) | Protected by non-recourse clause (if HECM) |
Steps for Family Members When a Reverse Mortgage Becomes Due
When the maturity event occurs, the reverse mortgage servicer will typically send notifications to the estate or known heirs. It's crucial for family members to act promptly.
- Notify the Servicer: Inform the reverse mortgage servicer of the borrower's death or permanent move. Provide a copy of the death certificate if applicable.
- Understand Your Options: Work with the servicer to understand the outstanding loan balance, the value of the home, and the available options for heirs.
- Consult Professionals: Consider consulting with a financial advisor, estate planning attorney, or real estate agent to evaluate the best course of action for the estate and heirs.
- Execute a Plan: Whether deciding to repay, sell, or deed the property, follow the servicer's instructions and timelines to complete the chosen option.
Important Considerations
- Timeline: Heirs are typically given a timeframe, often 6 to 12 months, to decide on a course of action and complete the necessary steps. Extensions may be possible under certain circumstances.
- Maintaining the Property: While the loan is being settled, it's essential to continue paying property taxes, homeowner's insurance, and maintaining the home to prevent foreclosure.
- Appraisal: An appraisal will be necessary to determine the home's market value, which is critical for calculating the payoff amount under the non-recourse provision.
Conclusion
While a family member generally cannot "take over" a reverse mortgage in the sense of assuming the existing loan and continuing draws, an eligible non-borrowing spouse has specific protections under current HECM rules to remain in the home. For other family members or heirs, the process involves settling the loan, typically by repayment or selling the property. Understanding these options and acting proactively are essential steps to navigate the complexities of a reverse mortgage upon the borrower's passing or departure. Seeking professional guidance ensures the best outcome for the estate and the family.
For more detailed information, consult the U.S. Department of Housing and Urban Development (HUD) resources on Home Equity Conversion Mortgages.
