How does a reverse mortgage work when you die

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A reverse mortgage is a type of home loan for older homeowners. Unlike traditional mortgages, they don’t require homeowners to make monthly payments. Instead, the borrower receives payment from the lender — either monthly, via a line of credit or in a single lump sum at closing.

These loans are typically reserved for borrowers 62 and up (though some lenders allow for ages down to 55). Homeowners often use them to reduce their monthly housing costs or increase their income in retirement.

Keep reading to learn more about reverse mortgages, how they work and whether one might be right for your financial goals.

  • What is a reverse mortgage?
  • How does a reverse mortgage work?
  • Reverse mortgage FAQ

Table of Contents

What is a reverse mortgage?

A reverse mortgage is a loan that allows seniors to borrow a portion of their home’s equity. They then receive that equity in cash — either in one upfront sum after closing, via regular monthly payments or by taking withdrawals as needed.

Reverse mortgages only come due when the borrower dies, lives outside of the house for more than 12 months (unless a co-borrower or eligible spouse is living in the property), sells the property or stops paying taxes and homeowners insurance.

Many older homeowners use reverse mortgages to supplement their income in retirement. Reverse mortgages can also help reduce monthly housing expenses (there’s no more monthly payment), increase cash flow or pay for home repairs or improvements for seniors aging in place.

Types of reverse mortgages

There are three types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages and single-purpose reverse mortgages.

Much like a regular mortgage, these loans can have either a fixed rate or adjustable rate. Fixed-rate mortgages give you a set interest rate for the entire loan term. With an adjustable-rate reverse mortgage, your interest rate can fluctuate over time.

Let’s take a look at how the three main types of reverse mortgages measure up.

Home Equity Conversion Mortgage (HECM)

A Home Equity Conversion Mortgage is a federally backed loan that’s regulated by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD). They’re only available through HUD-approved lenders.

HECMs offer a number of payment options:

  • A single lump-sum payment: You receive one large payment upfront after closing. This option is only available on fixed-rate reverse mortgages.
  • Monthly payments: You receive a monthly payment for a specific number of months (called term payments) or for as long as the house is your primary residence (called tenure payments).
  • A line of credit: You can withdraw funds as you need them. Meanwhile, the unused principal balance grows over time based on your interest rate. For example, assuming you get a $200,000 line of credit with a 4% interest rate, if you don’t use any of that money, the principal loan amount would go up to roughly $300,000 over the next 10 years. While this does mean you owe more money than you did at the start, you also have access to a larger line of credit in the long run. This means that you can potentially receive a larger amount of funds than originally requested over the life of the loan.
  • A combination of the above: You can also choose to combine monthly term or tenure payments with a line of credit. You can’t combine the lump sum with any other payment option, though.

With a HECM, the maximum amount you can borrow is $1,089,300 for 2023, though the amount you’ll qualify for depends on the appraised value of your home, your existing mortgage balance and other financial details. Your lender will require an appraisal of your property (sometimes two) to determine its value before moving forward.

What to know about HECMs

HECMs are insured by the FHA and are “non-recourse” loans, which means you’ll never owe more than what your house sells for (even if your outstanding loan balance is larger).

HECM borrowers must be 62 or older and are required to take part in a HUD-approved HECM counseling session before taking out a reverse mortgage. During these, you’ll learn about the HECM program’s requirements, repayment, tax implications and more. Your counselor will also discuss your individual needs and finances.

As with an FHA loan (another HUD-backed mortgage product), you will need to pay a mortgage insurance premium (MIP) with a HECM. This costs 2% of your loan amount upfront and 0.5% of your outstanding balance annually.

Home Equity Conversion Mortgage (HECM) for Purchase

A HECM for Purchase lets you take out a reverse mortgage on your current home and use the loan proceeds to buy a new principal residence. You might do this if you want to move into a new house, downsize or change locales but don’t want to wait until your current home sells to do so.

Like traditional HECMs, HECM for Purchase loans are only for borrowers 62 and up. They also require a sizable down payment — typically between 29% and 63% of the purchase price, according to the National Reverse Mortgage Lenders Association (NRMLA). The exact amount will depend on your age, your spouse’s age and the price of your new home. You will also need to cover closing costs, though these can be rolled into your loan amount.

Proprietary reverse mortgage

Proprietary reverse mortgages are offered by private reverse mortgage lenders and are specific to that company. These loans are often referred to as jumbo reverse mortgages, as they can exceed the limits set by HUD for HECM loans. (Some lenders even offer up to $6 million.)

They also don’t have to adhere to HECM’s age rules. As a result, many lenders allow for borrowers as young as 55.

Since proprietary reverse mortgages aren’t insured by the federal government, you won’t need counseling to qualify, nor will you pay monthly insurance premiums. However, you may pay a higher interest rate (lenders have less risk with government-backed loans and can therefore offer lower rates).

Single-purpose reverse mortgage

Single-purpose reverse mortgages are loans designated for a specific, lender-approved goal, like paying your property taxes or making improvements to your home.

These are offered by state and local government agencies and non-profit organizations and typically have lower fees and interest rates than other reverse mortgage products. Eligibility requirements also tend to be less rigid, so they may be easier to qualify for than a HECM or jumbo reverse mortgage would be.

How does a reverse mortgage work?

Reverse mortgages can be confusing. The easiest way to think about them is as an advance on your home’s eventual sale. The lender advances you the money, either in monthly payments, sporadic withdrawals or a lump sum, and when you pass on or sell your house, you’ll repay the loan — or your heirs will — out of your home’s sale proceeds.

During the course of your reverse mortgage, you won’t need to make payments to your lender (though you can if you prefer), but you will need to stay current on property taxes, insurance and homeowners association dues, as well as maintain the property. If you fail to meet these obligations, your lender could call your loan due or even foreclose on the house.

Reverse mortgage explained

Reverse mortgages are like traditional mortgages but in reverse. Instead of you paying the lender, the lender pays you. You only repay the loan once you pass away, sell the house or move out for at least 12 months.

In many cases, this arrangement means an heir may be responsible for repaying your reverse mortgage. We’ll go more into how this works below.

Qualifying for a reverse mortgage

In the case of HECM mortgages, the house has to meet HUD’s minimum property standards to qualify. Furthermore, you may be required to use some of the reverse mortgage proceeds for home improvements if your home doesn’t meet HUD standards.

You (and your home) also must meet the following requirements:

  • You must be at least 62 years old, own your home and live in it as your primary residence
  • You must have a significant amount of equity (typically 50% or more)
  • You must have the income or assets to afford taxes and homeowners insurance premiums on the house
  • Your home must be a single-family home, townhome, one- to four-unit property in which you live, manufactured homes built after 1976 or a HUD-approved condo
  • You must keep the house in good condition
  • You must attend financial counseling with a HUD-approved counseling agency

Eligibility requirements for proprietary reverse mortgages may differ from the above standards and will depend on the specific lender you’re working with. Many allow for borrowers down to age 55.

How do you pay back a reverse mortgage?

You generally pay back a reverse mortgage out of your home’s sale proceeds. This might occur when you decide to move or when you pass away.

In the case of death, your heirs will need to pay off the balance. This can be done out of pocket or by selling the house and using the proceeds. They also may take out a traditional mortgage loan or other loan product. Heirs will generally have 30 days to decide what to do with the loan and property.

When do you pay back a reverse mortgage?

In most instances, you won’t have to pay back a reverse mortgage loan as long as you live in the house. A reverse mortgage becomes due once all borrowers have died, sold the house or moved out of the home for at least 12 months (to an assisted living facility or nursing home, for example).

Here are the scenarios when your loan would come due:

  • You pass away. When you die, your heirs become responsible for paying back the loan. They can do this by selling the house, taking out a loan or paying it back out of pocket.
  • You sell the property. The loan is then paid off using your sale proceeds.
  • You live outside the home for 12 months. Reverse mortgages require your home to be your primary residence. If you live away from the house for more than 12 consecutive months, your lender can call the loan due. If your spouse is a co-borrower or an eligible non-borrowing spouse, they may be able to stay in the home without paying back the loan immediately.
  • You fail to pay property taxes or homeowners insurance. All reverse mortgages require you to stay current on taxes and homeowners insurance. Failure to do so will result in foreclosure. If you are unable to pay, seek a reverse mortgage counselor right away.
  • You fail to maintain the property. Reverse mortgage lenders require you to keep your home in good condition to protect their investment. If you fail to, they could foreclose on the property.

What happens at the end of a reverse mortgage?

Unlike traditional real estate loans, there is no term — or set payoff timeline — for reverse mortgages. Instead, the loan gets repaid when the borrower dies, sells their house or stops using the home as their primary residence. At this point, the home is sold, and the sale proceeds go toward paying off the loan balance. (Heirs can take other actions if they so desire.)

If you inherit a property with a reverse mortgage attached, you should get in touch with the lender as soon as possible. You may only have a few weeks to settle up or lose the property.

Reverse mortgage problems for heirs

Inheriting a home with a reverse mortgage attached to it can be challenging. Heirs must decide whether to pay off the reverse mortgage out of pocket (or with another loan) and keep the property or sell the home and use the sale proceeds to repay the balance.

Fortunately, if they do sell the home, they won’t ever owe more than the home’s worth (at least on HECM loans). In the event the home sells for less than the total reverse mortgage balance that’s due, FHA mortgage insurance will cover the difference.

How long do heirs have to pay off a reverse mortgage?

Heirs typically have 30 days to pay off the loan balance. In some cases, you may be able to request an extension of up to a year. A lender might grant this if you’re actively trying to sell the home or you’re working on obtaining financing (you’ll need to provide documentation). This information mainly applies to federally backed loans, though lenders may make exceptions for proprietary mortgages too.

If the heirs do not pay back the loan within the agreed-upon timeframe, the lender may foreclose on the home.

How to get out of a reverse mortgage

There are many ways to get out of a reverse mortgage. If you’re within three days of closing, you can exercise your right of rescission and cancel your loan. You’ll need to do this in writing, but once received, your lender has 20 days to refund your costs and fees.

If you’re past this window, you can pay off your reverse mortgage balance at any time, but your costs and fees will not be refunded. You can do this using cash, retirement savings or by selling your house.

You could also refinance — either into a new reverse mortgage with better terms or into a conventional loan, which you could use to pay off the reverse mortgage balance. Just remember, this would mean making monthly payments again. (If you do opt for this option, use our guides to the best mortgage lenders and best mortgage refinance lenders to start your search.)

How to avoid reverse mortgage scams

Reverse mortgages have been used to scam homeowners in the past. In many cases, the targeted individuals are not told that property taxes, insurance and home repairs must continue to be paid for, causing them to default on the loan — and resulting in an easy payday for the unethical lender.

Other scams include convincing borrowers that they should invest the reverse mortgage proceeds in risky investment schemes or put them toward house flipping activities or large and unnecessary home repairs. (The latter is usually perpetrated by unscrupulous contractors and construction professionals).

Here are some red flags to watch for when shopping for reverse mortgage loans:

Warning Signs Lenders that don’t explain the fine print or try to rush you through the loan process Companies that use aggressive sales tactics — like fear-mongering and cold calling Lenders who claim you can use a reverse mortgage to purchase a home without a down payment (HECMs for purchase will still require you to pay around 50% of the home’s value out of pocket.) Salespeople who rush you through the process, fail to answer your questions or say you shouldn’t get counseling before signing Contractors who say that the best way to pay for costly home repairs is to take out a reverse mortgage Anyone who suggests risky stocks or schemes (like house-flipping) or signing over the money to a third party

The best way to avoid being a victim of a reverse mortgage scam is:

  • Speak with a HUD-approved independent reverse mortgage counselor
  • Read the fine print before signing any loan documents
  • Be aware that you have a right to cancel your reverse mortgage loan within three business days of closing for any reason. You’ll need to send a request in writing to your lender, who will then have to return any loan expenses you have already paid
  • Don’t respond to unsolicited marketing or cold-calling

If you or someone you know is a victim of a reverse mortgage scam, submit a tip to the FBI, file an online complaint with HUD-OIG or call their hotline at 1-800-347-3735. You can also submit a complaint through the Federal Trade Commission or the Consumer Financial Protection Bureau by calling 1-855-411-2372.

Summary of Money’s Guide to Reverse Mortgages

  • A reverse mortgage can be a valuable tool to support retirement goals, reduce housing costs or cover the costs of necessary home improvements or property taxes.
  • Reverse mortgages can be accessed through FHA-approved lenders and private mortgage lenders. They are available for homeowners starting at age 55 to 62.
  • These loans can be disbursed as a lump sum payment, as a line of credit or as a monthly annuity. You can also combine monthly payments and a line of credit.
  • Homeowners should be fully aware of the responsibilities, conditions, and possible scams when looking for and applying for a reverse mortgage. Comparing lenders is also critical to ensure you receive good service and that you get the best deal.
  • A financial assessment is an important step before applying to see if you’ll be able to afford living expenses, health care costs, insurance and taxes after taking this type of loan. All federally backed reverse mortgages require professional counseling before you can be approved.

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What Happens to a Reverse Mortgage When You Die?

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