About 30 percent of reverse mortgage borrowers have an outstanding loan balance upon their passing. Reverse mortgages are often a superb option for seniors who need cash but are not interested in selling their homes. However, such borrowers must have a strategy for what will happen to the payoff. 

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Relatives also need to be aware of their options regarding retaining property ownership and financial obligations. This article outlines how reverse mortgages function for all parties involved, from the loan’s origination to the eventual expiration. 

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What Is a Reverse Mortgage?

A reverse mortgage is an appealing option for the elderly. Available to homeowners aged 62 and up, this loan allows a borrower to use their house as collateral. They retain the property title, just like a traditional mortgage. However, a distinct difference with reverse mortgages is that borrowers are not responsible for making payments. Instead, the loan gets repaid upon them vacating their home.

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To be eligible for a reverse mortgage, borrowers must maintain primary residence status at the property for the duration of the term. The purpose is to provide financial stability by utilizing home equity as accessible cash flow. Yet, this money is not free. A borrower’s stored equity funds decrease with this financing. The loan will have to be paid back, but it is often repaid through the sale of the property.

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Over the lifespan of a reverse mortgage, the amount owed increases. Alas, with a traditional mortgage, that amount decreases. The reason is that reverse mortgages accumulate interest and fees on the loan balance. On top of that, borrowers are still held accountable for payments toward homeowners insurance, HOA fees, and property taxes.

How does a reverse mortgage work?

With a reverse mortgage, homeowners can access their built-up equity without selling the property. This is an excellent resource for older adults who hope to remain in their current homes but need cash flow. 

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Unlike traditional 'forward' mortgages, lenders pay the borrowers. With conventional financing, homebuyers borrow the funds and then make payments over a specified time and at a specific interest rate until the principal is repaid. The approach for reverse mortgages is the opposite. 

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With the help of an appraiser, this process involves determining the home's value and deducting the amount owed to calculate how much equity can be borrowed. With each payment received, the borrower's amount owed will increase. Borrowers should not expect to pay until they either move out or pass away. When that time comes, they can repay the amount in increments or at once. 

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Keep in mind that there are also closing costs. These expenses tend to be about two percent of one’s total home value. These and other fees get deducted from the available credit. 

What Happens to a Reverse Mortgage When the Borrower Dies?

According to a Consumer Financial Protection Bureau study, about 60 percent of reverse mortgage borrowers decease within 18 months of taking out the loan. Of those individuals, almost 80 percent pass away within the first 12 months. Approximately 9 percent of reverse mortgage borrowers die before their loan even becomes due and payable.

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The average age of a reverse mortgage borrower at death is 84, with the median age being 89. At the same time, the average outstanding loan balance for these borrowers is $84,000, with the median being $50,000. Such figures can lead to many concerns about the impact death can have on one's reverse mortgage. 

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When is the remaining balance due and payable? Who is liable, and what are the consequences of not repaying? Can the borrower's heirs still keep the home? 

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Below, these questions get answered in detail.

Who Is Responsible for the Repayment of the Loan After the Borrower Dies?

When a person passes away, their outstanding debts often become the responsibility of their estate. That means the money or property they owned will pay off these debts. If there is insufficient funds or property to cover the debts, they will often go unpaid. In most cases, the deceased person's debts are no one else's responsibility. 

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The same logic goes with reverse mortgages. Alas, depending on whether there was a co-borrower or an eligible non-borrowing spouse on the loan may change that.

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Is your partner a co-borrower?

Reverse mortgages where the primary borrower's spouse or long-term partner is a co-borrower or an eligible non-borrowing spouse do not require repayment until both members move or pass. For instance, even if one co-borrower must relocate to a long-term care facility, the reverse mortgage does not have to be repaid until the second co-borrower leaves the home.

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The Consumer Financial Protection Bureau (CFPB) recommends that long-term partners and spouses list themselves as co-borrowers on reverse mortgages. That is due to the benefit of not leaving your loved one with such a burden. 

Is your partner not a co-borrower?

Partners or spouses not listed as co-borrowers may have to repay their loved one's reverse mortgage following their passing. However, whether or not they can remain on the property after the borrower's death depends on several factors, such as when the marriage took place and when they obtained the loan. 

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If non-borrowing spouses or partners do not have the right to stay at the property, the lenders may start foreclosure proceedings. There are alternatives, such as the Mortgage Optional (MOE) Assignment, which allows spouses to continue living in the house under certain conditions. Following the rules and regulations is essential as lenders will seek annual verification.

What Are the Options for the Heirs of the Borrower?

Once a reverse mortgage borrower and their eligible non-borrowing spouse pass, the loan becomes due and payable. Heirs have 30 days from receiving the due and payable notice from the lender to make a decision. They may choose to buy the home, sell the home, or turn the home over to the lender to satisfy the debt. However, it may be possible to get an extension of up to a year so that heirs can sell or obtain financing to purchase the home. Your heirs can consult a HUD-approved housing counseling agency or an attorney for more information.

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What are the options for the heirs if they want to keep the property?

Heirs who prefer to keep the home must pay off the reverse mortgage. Options include funding it themselves or taking out a new mortgage. A borrower's estate never has to pay more than the loan balance. If that figure exceeds the home's value, heirs can repurchase the house for 95 percent of the appraised value. 

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Paying off the reverse mortgage should occur within 30 days of the borrower's death. If more time is needed, heirs can request a 90-day extension from the lender. To do so, they must prove that they are making an effort to obtain the necessary funding.

What are the options for the heirs if they want to sell the property?

Sometimes, the estate heir lacks the funds to pay off the reverse mortgage balance and must resort to selling the home. If the balance is higher than the property value, heirs are not required to pay the difference. Lenders keep the sale proceeds as payment, while the mortgage insurance covers the rest. 

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A few options to eliminate an inherited reverse mortgage include:

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• Sell the home: Heirs can sell the home used as collateral to secure the reverse mortgage. Sale proceeds pay off the balance, and the heirs may keep the remaining profits. 
• Sell the home for less: If a reverse mortgage has a higher principal than the home's value, heirs can pay less by selling for 95 percent of the appraised value. Though the sale does not cover the entire balance, lenders cannot force borrowers or their heirs to pay the difference. 
• Deliver the lender a deed in lieu of foreclosure: Often, the inherited house of a reverse mortgage has a balance exceeding its worth. Some may choose to provide the lender with a deed rather than going through foreclosure. An heir's credit will not get impacted by such action.

What happens if the heirs cannot agree on what to do with the property?

When members of an estate with a reverse mortgage disagree on what to do, the court may decide. If the timeline for repayment gets missed, the lenders may turn over the property through foreclosure. Heirs are not obligated to a reverse mortgage.  

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How Does the Death of the Borrower Affect their Reverse Mortgage Loan?

The best practice is to have a payoff plan. The estate's heirs should be aware of the borrower's plan to repay their loan after death. Such a plan requires having the tools and information beforehand. For instance, mortgage experts often recommend having a will before taking out a reverse mortgage. 

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A will ensures the homeowner's assets, including the property, will be transferred to the proper individual upon death. This is important for reverse mortgage borrowers with a living spouse or partner. Without a will, probate will take place, and the state government decides who inherits the home. 

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Reverse mortgages have been a blessing for many homeowners. Alas, that is not to imply that logistics are not necessary.

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