Reverse mortgages allow an older person to tap the accumulated equity in their home without having to sell it. Eventually, however, the money will have to be paid back—a responsibility that often falls to the borrower’s heirs.
Here is what heirs need to know about reverse mortgages.
- Reverse mortgages typically need to be paid off when the borrower dies, moves out for 12 months or more, or sells the home.
- Co-borrowers can remain in the home and continue to receive loan payments.
- The rules for spouses vary depending on whether they are co-borrowers, eligible non-borrowing spouses, or ineligible non-borrowing spouses.
- Other heirs usually must sell the home or buy it themselves.
Reverse Mortgage Basics
The most common type of reverse mortgage is a home equity conversion mortgage (HECM). These loans are insured by the Federal Housing Administration (FHA) and issued by FHA-approved lenders. They are available only to borrowers ages 62 and older.
When the borrower (or last co-borrower) dies, moves out for 12 consecutive months or more (such as into a nursing facility), or sells the home, the loan must be paid off within a certain time frame. The specific rules and timing depend on whether the heir to the home is a spouse or someone else.
If You Are the Borrower’s Spouse
Here is a brief look at the three basic categories into which spouses fall. Please note that the following rules apply to HECMs originated on or after Aug. 4, 2014. The rules are different in some respects for older HECMs. You can find both sets of rules on the Consumer Financial Protection Bureau website.
1. Co-Borrowing Spouses
A co-borrowing spouse must be listed as such on the loan documents. To have qualified as a co-borrower in the first place, they must have been age 62 or older when the loan was issued. Younger spouses can’t be co-borrowers. Co-borrowing spouses can continue to live in the home after their spouse dies and receive payments from the lender. When the co-borrowing spouse dies or moves out, the home will go to their heirs, who will then have to pay off the loan as described below.
2. Eligible Non-Borrowing Spouses
Spouses who hadn’t reached age 62 when their spouse signed up for a reverse mortgage can be listed in the loan documents as an eligible non-borrowing spouse. If they meet all the qualifications, they will be entitled to remain in the home after their spouse dies. Those qualifications include having lived in the home at the time that the loan closed and continuing to make it their principal residence. Unlike a co-borrower, however, they won’t receive further payments from the loan. The loan will come due when the eligible non-borrowing spouse no longer lives in the home.
Same-Sex Couple Exemption
To qualify as an eligible non-borrowing spouse, you generally must be legally married under the laws of the state where you reside or where your marriage ceremony took place. However, same-sex couples who were legally prohibited from marrying at the time that the HECM was issued can qualify as eligible non-borrowing spouses if they subsequently married.
3. Ineligible Non-Borrowing Spouses
An ineligible non-borrowing spouse is one who isn’t a co-borrower and doesn’t meet the requirements of eligible non-borrowing spouses. A spouse in this situation can remain in the home only if they pay off the reverse mortgage.
If You’re Not the Borrower’s Spouse
If you’re not the borrower’s spouse but are listed in the mortgage documents as a co-borrower, then you have the same rights as a co-borrowing spouse. Otherwise, people who are not spouses who inherit a home with a reverse mortgage have three basic options:
- Sell the home and use the proceeds to pay off the mortgage—If any equity is left over, it’s yours to keep.
- Pay off the mortgage with your own money and keep the home—This may mean taking out a new, traditional mortgage.
- Turn the home over to the lender to satisfy the mortgage—This is known as a deed in lieu of foreclosure.
The rules say that you must pay off the loan within 30 days of receiving a Due and Payable Notice from the lender. However, you can request an extension of up to a year to sell the home or obtain financing so that you can buy it yourself.
The rules on HECMs protect heirs from owing more money on the mortgage than the home is worth. The most that you’re obligated to pay is either the loan balance or 95% of the home’s appraised value, whichever is less. FHA insurance will make up the difference to the lender.
Where to Go for Help
The laws on reverse mortgages can be complicated, especially for heirs who are not spouses and eligible and ineligible non-borrowing spouses. The reverse mortgage lender or loan servicer should be able to explain your options, or you may want to hire a lawyer.
You can also consult a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor for free or low-cost advice. HUD is the parent department of the FHA and has a search tool for finding an approved counseling agency on its website. The phone number is (800) 569-4287.
What are the different types of reverse mortgages?
There are three types of reverse mortgages:
- Home equity conversion mortgages (HECMs) are the most common type, and they are insured by the Federal Housing Administration (FHA).
- Proprietary reverse mortgages are issued by some private lenders but are not insured by the government. They can have higher loan limits than HECMs.
- Single-purpose reverse mortgages are issued by some state and local governments and nonprofit organizations. They must be used for a specific purpose, such as home repairs or paying taxes.
What if you live in a home with a reverse mortgage but are not a spouse or an heir?
If you live in a home that has a reverse mortgage and are not a co-borrower, an eligible non-borrowing spouse, or an heir to the home, you will be required to move out after the borrower dies or leaves the home for more than 12 consecutive months. Heirs also have to move out unless they pay off the mortgage and purchase the home.
Can a borrower pay off their own reverse mortgage?
Yes, the original borrower can pay off the reverse mortgage, such as by selling the home. In some instances, the borrower may be required to pay it off, including if the home has fallen into serious disrepair or if they are unable to keep up with their homeowners insurance or property taxes.
The Bottom Line
Reverse mortgages have to be paid off after the last borrower dies or moves out. Heirs have several options at that point, depending on whether they are eligible or ineligible non-borrowing spouses or other heirs. If you expect to inherit a home with a reverse mortgage, you might want to consider your options (such as selling the home or buying it yourself) beforehand. If you’re a borrower with a reverse mortgage, you’ll do your heirs a favor by discussing the options with them.