If you’re considering a reverse mortgage or already have one, you likely want to know more about what happens to the mortgage when you die. Here’s a closer look at your family’s options, when spouses may have to repay a reverse mortgage loan, and how you may be able to set up a reverse mortgage to meet your long-term goals.
How Reverse Mortgages Work When You Die
A reverse mortgage is a type of home equity loan that makes regular payments to the borrower over their lifetime. When the borrower passes away, the loan balance must be repaid in full within a reasonable but limited time. Over time, the loan balance gradually increases, including principal and interest. In most cases, the lender requires the owner to live in the property full-time and maintain the home in good condition. When the borrower passes away, the loan must be repaid, typically by selling the home. However, if the family or other heirs prefer to keep the home, they can choose to pay off the loan, commonly by refinancing.
Reverse Mortgage Options After You Die
If you have a reverse mortgage and pass away, there typically are clear guidelines explaining how the estate should handle the loan and property. The following are the most common reverse mortgage options after you die.
Co-Borrower Remains in the Home
If you are married and have your spouse as a co-borrower, or another live-in partner who’s a co-borrower on the loan, they can typically stay in the house and continue with the loan. Once that person passes away, either of the following situations can occur. When a co-borrower becomes the sole living borrower on the reverse mortgage, they may choose to sell the home and pay off the loan or refinance to keep the reverse mortgage.
Sell the Property To Pay Off the Loan
Most commonly, when the borrower or borrowers on a reverse mortgage pass away, their heirs sell the home to pay off the loan. If your heirs sell the property and the home proceeds are more than the loan balance, your heirs can keep the excess funds. The rules protect your family from paying more for the home if you pass away, even if the house isn’t valuable enough to cover the reverse mortgage debt. Heirs have 30 days to repay the loan after receiving the due and payable notice from the lender, although this can be extended for up to a year.
Pay the Loan and Retain the Property
If your heirs want to keep the home, they must repay the loan balance in full or 95% of its appraised value, whichever is less. This protects your family from having to pay more than the home is worth to keep it. For a beloved family home, the ability to pay off the reverse mortgage and keep the property is a key loan feature. As with a sale, the heirs may have a year to figure out the financing before they’re forced to repay the loan.
When Spouses May Have To Repay Reverse Mortgages
If you’re married, it’s essential to set up a reverse mortgage with care. If you make yourself the only borrower, your spouse could be forced out of the home when you pass away if they don’t have the money to pay off the loan.
Spouse Is a Co-Borrower
If the spouse is listed as a co-borrower on the loan, the reverse mortgage should continue unimpeded as long as the co-borrower is alive. This lets you rest easy that your loved one won’t lose their home when you’re no longer around.
Spouse Is Not a Co-Borrower
Even if your spouse is not on the loan, an eligible non-borrowing spouse can stay in the home. If your loan originated on or after Aug. 4, 2014, an eligible non-borrowing spouse can stay in the property even if the borrower moves into a health-care facility or passes away. There are precise rules on these circumstances, so it’s good to look into the details if they pertain to your situation. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
