Death, Reverse Mortgages and Heirs

We all know that there are only two guarantees in life: death and taxes. Seeing as none of us are going to get out of here alive, it seems appropriate to discuss what happens when the last surviving spouse passes away when a reverse mortgage is secured by the property.

This is a question that comes up with nearly every client of ours when discussing the option of a reverse mortgage. And there’s good reason for it. This loan is designed exclusively for older adults aged 62 or older. Seniors want to protect their estate and make sure that they are not making a decision that will harm their legacy when bequeathed to their heirs. So, what happens when the last surviving spouse passes away?

The lender is generally notified of a borrowers passing by the heirs / estate, by “death audit” service, which compares the lender’s database against other databases including the social security death index, or other methods available. Once the lender has confirmed the death of the last surviving spouse, a letter is sent to all known heirs. The letter acts as a repayment notice that informs the estate / heirs that the mortgage is due and payable as well as all of the options available for satisfying the loan obligation, which are:

  1. Pay the debt in full;
  2. Sell the property to an unrelated third party for the lesser of the debt, if any, or 95% of the appraised value;
  3. Complete a deed in lieu of foreclosure (this is when the estate / heirs signs the property back to the investor); or
  4. Walk away from the property, which would result in foreclosure.

It’s important to remember that a reverse mortgage is a “non-recourse” loan, which means that the property stands for itself. This means that if the loan balance has grown beyond the value of the property, the heirs / estate could just sign a deed in lieu of foreclosure with no negative effect on their financial standing. On the flip side, if there’s still remaining equity, the heirs / estate can sell the home or satisfy the lien by any other method available to them and retain whatever equity remains after the debt has been satisfied.

The heirs / estate have up to one year to sell the property or payoff the loan. This can be accomplished only by constant communication with HUD and the lender. Per HUD Handbook 4330.1, “If the estate is making reasonable effort to sell the property, extensions should be granted in 3-month intervals with the entire process not to exceed 12 months.

To summarize, dealing with death is not an easy subject, but it is of utmost importance to seniors and their heirs / estate to understand every facet of reverse mortgages including what happens after the last surviving spouse passes away. In the words of Mahatma Gandhi, “Live as if you were to die tomorrow. Learn as if you were to live forever.”