How Does a Reverse Mortgage Work When You Die

As most borrowers already know, your reverse mortgage loan balance will come due when you die.

But what does that really mean? Does it mean the lender shows up after your funeral to change the locks? Will your heirs have a chance to keep the home? How long would your heirs have to pay off the loan balance?

In other words: How does a reverse mortgage work when you die?

Your heirs will have some options. See the below table of contents for options.

Paying off the reverse mortgage balance

Reverse mortgages require no monthly payments, but in other ways they’re like any other mortgage loan: The reverse loan has a balance; if the balance isn’t paid as agreed, the lender could sell the home to pay off the balance.

If your heirs can pay off the loan balance, they’d take away the lender’s ability to foreclose. Could your survivors use your life insurance payout, or other assets from your estate, to pay off the loan? Or could they use their own money to pay off the reverse loan and keep the home?

With most reverse loans, your heirs will have 30 days to decide what to do with the property, and may be granted up to six months to perform the decided action.

The clock starts when your heirs receive the reverse loan’s balance-due statement — not when you die.

Refinancing out of the reverse mortgage

If your heirs want to keep the home but don’t have cash to pay off the reverse mortgage balance, they could refinance the debt.

Refinancing pays off the reverse loan with money from a new mortgage loan. To refi, your heirs would need to qualify for the new loan. That means meeting the new lender’s credit score and income limits. Qualifying could require making a down payment if the reverse loan’s balance rivals the home’s value.

Your heirs would also need to own the home before they could refinance it, and the deed may not automatically transfer to your heirs when you die. An estate planner — one who knows your state’s specific laws — could help you arrange a more seamless ownership transition.

In any case, your heirs should be in touch with your reverse loan lender throughout the refinancing process. Reverse lenders understand refinancing takes time. But they will need to see proof the home’s new owners are making progress with the refinance that will pay off the reverse mortgage balance.

Selling the home

Selling the home can generate the money needed to pay off a reverse mortgage loan. Of course, your heirs couldn’t sell and keep the home. But if they didn’t plan to keep the home anyway, selling could be the ideal way to satisfy the reverse mortgage debt.

Depending on the reverse loan balance, selling the home could generate more than enough money to pay off the reverse loan. Let’s say your home is worth $350,000 and the reverse loan balance is $175,000. In this case, your heirs could pay the debt and still clear a decent amount of money after agent fees and other costs of selling.

But what happens if proceeds from the sale won’t pay off the entire reverse loan balance?

If your reverse loan is a Home Equity Conversion Mortgage, or HECM, your heirs won’t owe the difference. Instead, the government will cover the shortfall. For this to work, your heirs will need to sell the home for at least 95% of its appraised value at that time.

Handing the home over to the lender

If your home is “upside down” — which means the reverse loan balance is higher than the home’s value — your heirs could transfer the home’s deed to the lender to satisfy the debt. This is called a deed in lieu of foreclosure.

With this plan, the lender takes ownership and sells the home to pay off the loan balance. This is usually the last choice for lenders. After all, owning and selling property costs money.

It’s probably not what you had in mind either. But if your heirs have no other way to pay off the debt, this is one way to eliminate it.

Do heirs have to pay any shortfall?

What if your home is worth $300,000 but the reverse mortgage balance has grown to $330,000? Will your heirs have to come up with $30,000 in addition to handing over the deed to your home? 

They shouldn’t. Most reverse loans are Home Equity Conversion Mortgages, and with HECMs, insurance from the Federal Housing Administration (FHA) pays the shortfall.

Other types of reverse mortgages, known as proprietary loans, may not include this kind of protection. To find out how your loan works, read the terms of your loan.

How long do heirs have to pay off the loan?

After you die, your reverse mortgage lender will send your survivors a loan statement. The statement will show the full balance due. Your heirs will have 30 days to decide what to do with the property. They may be eligible to receive an extension of six months to perform that action, such as a sale, refinance, or loan pay-off.

That said, the lender won’t automatically show up, ready to foreclose, the day after the deadline. While lenders have the right to foreclose, the process costs the lender money. Most would rather work with your survivors to satisfy the debt.

So, if your heirs decide, for instance, to sell the home, your reverse lender can grant an extension while your heirs list and sell the home. Same goes for refinancing.

The key: Stay in touch with the reverse mortgage lender. Discuss plans for paying off the debt, and then keep the lender in the loop as the plans progress. Not communicating with the lender will increase the chances of foreclosure.

How to give your heirs more options

It’s safe to assume reverse loan borrowers don’t want to leave their heirs saddled with mortgage debt. They’d rather bequeath a home that’s an asset.

But a reverse mortgage, like any kind of loan, creates liability. And since a reverse mortgage requires no payments, annual fees and interest can grow the loan’s balance, increasing the size of the liability in relation to the home’s value.

Keeping your reverse loan balance lower could give your survivors more payoff options. You could keep debt in check by:

Using the credit line option

Most reverse mortgages, including HECMs, allow homeowners to open a credit line instead of receiving cash. You can repay the credit line, leaving less debt. Plus, credit lines can encourage smaller loan amounts — assuming you withdraw only what you need.

Making optional payments

Reverse loans don’t require borrowers to make monthly payments, but borrowers can still make payments. Paying the annual interest and fees on a loan balance can help keep debt from growing.

Getting a single-purpose loan

Single-purpose loans don’t deliver cash to the homeowner. Instead, they use loan proceeds to pay important bills, like property taxes and homeowners insurance premiums. This kind of loan can alleviate financial stress while limiting debt.

Discussing the loan with your heirs

Borrowers who worry how their reverse loan would affect their estate should consider talking with their children or other heirs about the debt. This can help prevent the debt from surprising heirs later.

Shopping around

It’s easy to overlook fees and interest rates with reverse mortgages because borrowers don’t immediately see the impact of these costs. But shopping around for the lowest rate and the lowest upfront and annual fees can help reduce the debt load your heirs face.

Plan ahead can limit the downside of a reverse loan

Reverse mortgages come with pros and cons. One of the biggest cons is what happens to the reverse mortgage when you die. Unless you have a co-borrowing spouse or a spouse who’s an eligible non-borrower, the loan balance will come due.

Making a plan for how your heirs will pay off this debt can limit the downside of a reverse mortgage and give you more freedom to leverage the home equity you’ve worked hard to build.