Paying off a reverse mortgage is inevitable- at some point, the loan will need to be paid back. For adult children or heirs who inherit their parents’ housing assets with FHA (Federal Housing Administration)-insured HECM reverse mortgages, it can feel overwhelming. The impulse is often to find out how to get out of any mortgage debts immediately; it is hard to deal with our loved ones’ debt, especially while grieving. To answer the most common questions about paying off the reverse mortgage called due – and discover some options for handling the process – read on.

How Do Reverse Mortgages Work?

The HECM (Home Equity Conversion Mortgage), allows people aged 62+ to maintain equitable title and reside in their home while allowing them access to their equity as though it were cash in hand. To enable this, monthly mortgage payments are suspended in exchange for a promise to pay the full amount to the lender upon a maturity event like passing away, moving out of the home, or failing to meet other loan terms.

As an heir or executor of an estate, you may need to make arrangements for the loan to be repaid. Usually, this is done through the sale of the home, but it can also be repaid through a refinance or with other methods, such as cash, possibly from a life insurance fund or other sources if you would like to keep the home. Reverse mortgages are non-recourse loans, which means the debt can not be passed on to anyone. If the debt is more than the home value, the FHA will only require 95% of the home’s appraised value as repayment. Your parent’s home will not only allow them access to the equity as cash while they are alive, but it will also pay the debt that has been accrued, leaving you, their heirs, with a clean slate.

Keep in mind that most people carry a traditional mortgage into retirement with the intention of paying it off at some point. Many people pass away while still paying on their mortgage loan and these loans may also need to be settled upon the passing of the borrower. Reverse mortgages are designed specifically for seniors, so the end-of-life plan is something the servicing company is familiar with.

Reverse mortgage borrowers need a plan for how they think their home should (or more likely will) be dealt with upon passing. Family members will need to understand this complex mortgage-debt-FHA-banking contract and be part of the decision-making process as early as possible. Ideally, before the borrower passes away, they will have contacted the servicing company and designated an heir or executor as a point of contact for their account. Doing this ensures the heir’s access to information about the loan if the borrower is no longer able to make contact. After the passing of the borrower, the servicing company will need to be contacted with information about the borrowers passing. You will want to get the loan balance from them and contact information to provide a payoff.

When the Loan Has to Be Repaid

In exchange for the borrower’s delayed promise to pay, a suspension of monthly mortgage payments, and conversion of the equity into cash, the total loan repayment is usually requested within 30 days of the last surviving borrower’s death. Extensions may be requested from the servicing company if the timeline is not feasible for you. When paying off a reverse mortgage called due, it is very important to stay in contact with the loan servicing company and provide them with the information they request in the proper timeframe.

But what happens to a non-borrowing spouse? If the reverse mortgage was undertaken after August 4, 2014, the non-borrowing spouse can continue to live in the home as long as all loan terms continue to be met (with some limited exceptions). If the loan was made before August 4, 2014, they could be at risk of being displaced and should consider a reverse mortgage refinance to ensure the surviving spouse has the enhanced benefits that come with the updated loan products. The surviving spouse could consider paying off the reverse mortgage themselves and continue living in the home.

Future heirs and surviving spouses should be included in the decision-making process and fully aware of the details pertaining to their parents’ reverse mortgage loan, the different legal-financial impacts it may have, and their plans with the loan and the home after passing. It is good for families to understand how the loan works, what the obligations are, and know who they can contact for information as early as possible.

What a Borrower’s Death Means For Heirs

As difficult as the topic of mortality can be, it’s a sign of great love and respect to have clear and open communication between generations about mortgages and other financial obligations that will impact the surviving family members upon their elders’ passing. Only then can heirs fully know what options they have available to them, as they inherit the legacy their family has built. We urge families to communicate about paying off the reverse mortgage before the time comes.

Options for Your Heirs to Pay Off The Reverse Mortgage

Instead of simply owning an estate-inheritance outright, it behooves beneficiaries to know their options for discharging or otherwise overcoming reverse mortgage problems for heirs:

• Paying off the mortgage debt by selling the house on the open market is the most common outcome.
• Selling or buying the house, if underwater, for 95% of its appraised value is sufficient to pay off the loan, because the loans are non-recourse.
• Offering an heir time to take out a new mortgage to pay off the reverse mortgage.
• Refinancing or paying off the reverse mortgage with one’s savings or other cash sources (upon meeting credit score and debt-to-income standards, then making a down payment).
• Renting out the newly re-loaned home, or finding extra income, allows heirs to cover the cost of the refinancing arrangement.

Reverse Mortgage Problems and Responsibilities for Heirs

As you can see, there are some legal, debt, and other financial issues that heirs will need to quickly contend with. Getting on the same page early on about the reverse mortgage arrangement (or any posthumous contractual obligations) one’s parents are involved with is the foundation for protecting their legacy. Find out their plans, how they involve you, and what information is necessary to execute their last will.

Fulfilling the Will

Clarify who must take on the house and attendant mortgage responsibilities upon the legal date of death. Ensure that the one named is competent enough to do so, lest the entire process be sent to probate court which decides where some, or all, of the inheritance asset in question will go.

Separating Death From Taxes

The IRS offers (as of early 2022) a home interest tax deduction when or if the mortgage is paid off. To ensure heirs can apply for this benefit, records must be held that prove exactly how the reverse mortgage funds were used. Be sure that the funds are used in ways that justify this tax deduction if you plan on accepting this tax filing benefit. Please reach out to your local tax specialist for more information.

Paying Off A Reverse Mortgage

With the right foresight, planning, and communication, there are some options to wisely handle the particular challenges of passing away with a reverse mortgage. It’s difficult enough to find out one’s parents passed away; learning about a debt-mortgage liability on top of it (when what you need is time to grieve) means you’ll need an alliance. It is imperative you stay in contact with the servicing company and adhere to their timelines to ensure the optimal outcome when paying off a reverse mortgage.

If you are looking for only the most competent and trustworthy local source for home equity expertise, contact
Northwest Reverse Mortgage to get in control of your reverse mortgage planning needs once and for all. Our reverse mortgage experts are fully licensed to serve homeowners in Oregon, Washington, Idaho, and California. Contact us today for a prompt and personal response to any reverse mortgage questions you may have.

The National Reverse Mortgage Lenders Association (NRMLA) created a booklet with some great guidance on how to navigate a maturity event. Download the booklet here to learn more about paying off a reverse mortgage.