A reverse mortgage allows a senior homeowner to borrow against the value of her home and not worry about making payments on the loan. However, when the homeowner passes away, the reverse mortgage lender will require the repayment of the outstanding loan amount. The estate executor and heirs of the deceased homeowner must make arrangements to repay the loan.
In reverse mortgage jargon, a loan becomes payable when a "maturity event" occurs. The death of the final homeowner on the loan is one such trigger event. Other ways that a reverse loan becomes payable include the sale of the home, the homeowner moving from the home, the homeowner leaving the home for more than 12 month due to illness, and tax or insurance delinquencies. If two homeowners initially received the reverse mortgage, the repayment trigger occurs when the last one dies or leaves the home.
Payment Due Immediately
When a reverse mortgage maturity event occurs -- such as the death of the last homeowner -- the loan becomes due and payable. This means the mortgage lender expects prompt repayment of the full outstanding loan balance. The National Reverse Mortgage Lenders Association website states that the lender can begin a foreclosure procedure on the home 30 days after the repayment is triggered and the loan becomes due.
Since the reverse mortgage becomes due for payment upon the death of the homeowner, the heirs should contact the lender or mortgage servicer as soon as possible to discuss options for paying off the loan. Mortgage lenders understand that it may take time to sell the home. If the heirs communicate with the lender concerning the disposition of the home, foreclosure steps can usually be put off. The NRMLA website states that a reverse mortgage lender can usually delay foreclosure for up to one year.
If the home is worth more than the reverse mortgage loan balance, the remaining equity will go to the heirs. The heirs can sell the home, pay off the reverse loan and keep the remaining cash. Another possible option would be for one or more heirs to apply for a conventional mortgage on the home to cover the amount of the reverse mortgage payoff. This option would allow an heir to keep the home. If the reverse mortgage balance is greater than the home's value, the lender is limited to receiving the value of the home if the home is sold or foreclosed on.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.