A reverse mortgage is a loan, and it will need to be paid when certain events occur. These are referred to as “maturity events” and will cause the loan to become due and payable.
If the property is no longer the principal residence of at least one borrower, the loan matures and becomes payable. This could happen if the last borrower has passed or they have vacated the home permanently.
If the property has not been lived in by at least one borrower for 12 consecutive months, the loan becomes due and payable. An example of this would be if the last borrower has moved into a nursing facility and they have been there 12 months or more.
If a borrower fails to fulfill their obligations of the loan it will become due and payable. This includes failing to maintain the condition of the property, failure to pay property taxes and homeowner’s insurance, and/or failure to pay any other property charges such as HOA dues or flood insurance.
If a borrower conveys title of the property to someone else, the loan becomes due and payable.
What Happens When You Die, and What Needs to Be Done?
With regards to the reverse mortgage,when you die, the first thing that needs to happen is the heirs or whoever is handling the estate needs to contact the servicer immediately. The contact information for the servicer will be on any statement and most of the other documentation you have received from the servicer.
Once contact has been made, a demand letter will be mailed. The letter offers condolences but is also very clear about what is going to happen and why. The letter will state the current loan balance, options for paying back the reverse mortgage, time frames for response and options to avoid foreclosure.
It is important to know that servicers utilize various services that will notify them when there is a death.It is important to contact the servicer immediately as many of the time frame sand deadlines are based on the actual date the borrower passed away, not the date the servicer found out or was contacted.
The payoff is due immediately;however the estate has up to six months to satisfy the debt. If additional time is needed, up to two 90 day extensions can be requested. The request must be approved by the U.S. Department of Housing and Urban Development. You will need to prove that the property is being actively marketed or that financing is actively being pursued. Please note that interest and mortgage insurance will still be accruing.
The servicer may be required to start the foreclosure process if the initial “demand letter” is not responded to or if the initial six months have been exhausted or the 90 day extensions were not requested or not approved or the 90 day extensions have been exhausted.
Remember, this is anon-recourse loan which means that once the home is sold you do not have to pay any more than the appraised value, even if the loan exceeds the appraised value.If the loan balance is less than what the home sold for, the heirs retain any equity.
While this covers what happens when you die, the process is very similar if there are any other maturity events causing the loan to become due and payable.
Options for the Estate Upon Death of Last Borrower or the Home is No Longer
the Principal Residence
Sell the Property – If there is equity in the property beyond what is owed on the current mortgage balance, it behooves the estate to sell and net the equity. If there is no equity the estate can still sell the property at 95% of the appraised value.
Deed in Lieu of Foreclosure – If there is no equity, or the estate does not want to deal with the sale of the property, the estate could execute a deed in lieu of foreclosure. There is also the option of utilizing the “cash for keys” program where the estate is incentivized to utilize the deed in lieu of foreclosure.
Purchase the Home Out of the Estate – If one of the heirs wants to keep the home, they could purchase the home out of the estate. If the amount due exceeds the appraised value, it can be purchased out of the estate for 95% of appraised value.
Pay Off the Loan in Cash – Should the estate want to keep the home, the reverse mortgage could be paid off with cash.
Foreclosure – If there is no equity, the estate could just let the servicer foreclose on the property. This is anon-recourse loan and the servicer cannot pursue the estate for any legal fees or losses due to the foreclosure. The sale of the home satisfies the debt.