Q: What happens to the house of someone who secures a reverse mortgage?
A: Before answering, let me clarify that my response applies only to the home equity conversion mortgage, or HECM, program administered by the U.S. Department of Housing and Urban Development, in which the investors in the mortgages are insured against loss by the Federal Housing Administration. Many private reverse mortgage programs with fewer consumer protections have come and gone over the years, and the information I'd provide on those programs would be much different.
So, let's run through some scenarios:
OWNER/BORROWER REMAINS ALIVE AND KICKING
_Owner/borrower sells the house: In some cases, reverse mortgage borrowers change their minds about aging in place. They may decide to downsize or move to a retirement community or to a nursing home. In all such cases, they sell their existing home, which requires that they pay off the reverse mortgage balance. After that, the net proceeds from the sale belong to them.
_ Owner/borrower retains the house but repays the HECM: Occasionally, homeowners treat a reverse mortgage in the same way they treat a forward mortgage: They pay it off. There are no prepayment penalties on a HECM, so the borrower who wins the lottery can eliminate her debt with no hassle. They can also pay down the balance but leave the HECM in place in case they need to access it in the future.
BORROWER DIES WITH SIGNIFICANT EQUITY IN THE HOUSE
When a HECM borrower dies, all known heirs receive a condolence letter from the mortgage servicer that tells them what their options are. If there is significant equity in the house (meaning that property value is well in excess of the HECM loan balance), the relevant option is to pay off the balance.
_ Heirs want the house: In this case, the heirs acquire the title by repaying the HECM loan balance. If the heirs keep the servicer informed regarding their intentions and their status and document their intention to acquire the property, they may have up to a year to repay the balance. They have an incentive to move quickly, since interest and insurance premiums accrue until the loan is entirely paid off.
_ Heirs don't want the house: This case is the same except that the heirs can obtain the funds needed to pay off the HECM by selling the house. The heirs will retain the difference between the HECM loan balance and the net sale proceeds.
BORROWER DIES WITH A HOUSE THAT IS UNDERWATER
If it is very clear that the reverse mortgage loan balance exceeds the value of the home, one option relevant to the heirs is to do nothing. This will trigger a foreclosure action by the servicer. In some cases, the heirs might be asked to complete a deed in lieu of foreclosure, but as far as the heirs are concerned, the result is the same. The borrower's estate is not in any way liable for the excess debt, which becomes a charge against the insurance reserve fund.
If the heirs want the house, they can get it without being stuck for the excess debt. HUD offers heirs the option of paying 95 percent of HUD appraised value, less closing costs and real estate agent commission. For example, if the HECM debt is $200,000 but the HUD appraised value is only $100,000, HUD will accept $95,000 less documented costs.
BORROWER DIES BUT LEAVES AN ELIGIBLE NON-BORROWING SPOUSE
HUD made some rule changes beginning in 2014 designed to protect non-borrowing spouses, or NBSs, from being forcibly evicted on the death of the borrowing spouse. These rules have weakened the position of the borrower's heirs in cases where the borrower has an eligible NBS. An eligible NBS was younger than 62 and married to the borrower when the reverse mortgage was taken out, remained married until the borrower died, and has lived in the home as her permanent residence.
The existence of an eligible NBS creates a deferral period of unknown length. So long as they pay the property taxes and insurance, the NBS can remain in the property until they die. Meanwhile, the HECM loan balance continues to increase. One potential heir I know, who has a parent looking to marry a much younger spouse before taking out a reverse mortgage, is talking up the benefits of a permanent liaison instead of marriage.
