Generally, the heirs of an estate notify the mortgage company that the borrower dies. Notification also may come from the legal representative for the person’s estate or from the individual responsible for handling the person’s financial affairs after death. When the families of deceased borrowers don't report the death, lenders often find out through a death audit reporting service.
Reverse Mortgage Becomes Due
Death auditing identifies deceased customers by comparing the information in the lender’s database with death records, primarily the social security death index. Once a lender confirms the borrower's death, it sends out a repayment letter notifying the heirs or the deceased's estate that the loan is due. The loan can be paid in full or the property can be sold to pay off the debt. Worst-case scenarios include the heirs signing the property back to the lender through a process known as deed in lieu of foreclosure or defaulting on the loan, which causes foreclosure.
Surviving Co-borrower
When it comes to couples, the surviving co-borrower on a reverse mortgage loan who is also the co-owner may continue to live in the home after one borrower dies. The loan won't come due until that borrower either moves out of the home permanently or dies. When someone who is a co-owner but not a co-borrower lives in the home, that person must pay off the reverse mortgage or else the lender can foreclose. This might be the case if the surviving spouse was younger than age 62 at the time the borrower applied for the loan and could not be listed as a co-borrower.
Heirs Paying Off Reverse Mortgage
The lender does not automatically take over ownership of the home when the borrower dies, although the person who inherits the home must pay off the reverse mortgage loan. When heirs sell the property to pay off the loan, any remaining equity in the home is theirs once the loan is satisfied. If the home depreciates in value and the sale of the home does not bring in enough money to repay the entire balance of the loan, an heir is not personally financially responsible for paying the difference. Lenders give family members from three to 12 months to pay off the loan or sell the home. Extensions are not automatic and must have the lender’s approval.
Understanding the Technicalities
Anyone who inherits a home under a reverse mortgage won't own the property until the reverse mortgage is paid off. This may be unwelcome news for a dependent living in the home who is not a co-borrower and who is not in the financial position to pay off the loan. The amount of the payoff would include the loan principal, accrued interest and monthly service fees added to the loan balance each month. Other costs added to the balance may include a loan origination fee, upfront and monthly mortgage insurance premiums and other loan costs.
