Reverse Mortgage offer benefits to seniors who can access the equity that they have in their home for extra income. What happens if the borrower dies, leaving a non-borrowing spouse? Lending institutions often have to help the surviving spouse navigate the bureaucratic fallout that occurs when the borrowing spouse dies. If the surviving partner is not prepared for the, the resulting lack of communication can cause significant loss of money and even property.
Reverse-mortgage borrowers must be 62 or older and have paid off most or all of their mortgage. Under a HECM loan borrowers don’t need to pay back principal or interest until the home is sold or the homeowner dies.
Up until last year, if the sole signee on a Reverse Mortgage died, the non-signatory partner would have to leave the home. As of August 2014 new non-borrowing spouse rules allow those spouses to remain in the home even after the borrower has passed away.
Today, the vast majority of reverse mortgages are federally-insured home-equity conversion mortgages. Borrowers are allowed to tap into 60% of their home equity up to a maximum loan amount of $625,500. However, the FHA has instituted stringent repayment rules that must be followed to allow a non-borrowing spouse to continue to live in the home.
When the last remaining borrower living in the property dies, the Federal Housing Administration requires that their loan servicer send a letter which states that the balance of the loan is due. The estate administrator or heir is given 30 days to state whether the loan will be repaid or the house sold. A response must come within that time or foreclosure proceedings may be initiated.
If a non-borrowing spouse is living in the house, s/he must send the lending institution a clear statement of intent, within 30 days, stating his/her position in the home and his/her intention to continue to live in the house
Prior to August 2014, non-borrowing spouses were required to evacuate the house after the borrowing spouse died or move out. However, after a class action suit on behalf of non-borrowing spouses, HUD changed the rule.
Today, a non-borrowing spouse, even if under age 62, can remain in the home as long as he or she wants. The spouse won’t receive monthly payments of home equity and interest will continue to accrue. But there is no lender deadline or foreclosure.
If no spouse is living in the home when the borrower dies or leaves the property, the heirs must write a letter to the lending institution within 30 days to inform them of their intentions – whether they plan to buy the house, take out a traditional mortgage on the house or allow the house to be sold to repay the Reverse Mortgage. Failure to write this letter within 30 days – even if the heirs need a time extension to organize the procedure – can result in foreclosure.
More tips to avoid reverse-mortgage surprises:
*Borrowers should talk to their heirs in advance to review repayment rules and ensure that everyone knows what to do in all cases.
*Keep current with home values. Home sale prices generally exceed the loan amount, meaning that if the house sells for less, the heir will never be responsible for the difference.
*Prepare to see interest rates accrue. Interest will continue to accrue on a loan until the house is sold or the mortgage is paid off. The estate will receive a mortgage-interest deduction on its tax return.