How Does a HECM Reverse Mortgage Affect Your Heirs?

What Happens to the Home After the Borrower Passes Away?

A HECM reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity into loan proceeds while retaining ownership of their property. But what happens to the home after the borrower passes away?

When a homeowner with a HECM reverse mortgage passes away, their heirs must decide how to handle the outstanding loan balance. The home does not automatically transfer to the heirs without action. The lender will expect repayment, but heirs have several options to manage the situation.

Do Heirs Have to Repay the Reverse Mortgage Loan?

Yes, the loan must be repaid. However, repayment does not necessarily mean heirs must use their own money. The amount due is typically the lesser of the loan balance or 95% of the home's appraised value. Heirs have a few choices:

• Sell the home: If the property has appreciated, heirs can sell it, repay the loan, and keep the remaining proceeds.
• Keep the home: If heirs wish to retain the property, they can pay off the loan balance using other assets or refinance into a traditional mortgage.
• Deed the home to the lender: If the loan balance exceeds the home's value, heirs can choose to hand over the home, allowing the lender to sell it.

How Does a Proprietary Reverse Mortgage Impact Heirs?

A proprietary reverse mortgage is a private loan that functions similarly to a HECM but is not insured by the federal government. This type of loan often applies to high-value homes and can provide larger loan amounts. However, because proprietary reverse mortgages are not government-backed, their terms may vary by lender.

For heirs, the process is similar: they must repay the loan or forfeit the property. However, since proprietary loans do not have the same non-recourse protections as a HECM reverse mortgage, heirs should carefully review loan terms before making decisions.

Will a HECM Reverse Mortgage Leave Heirs in Debt?

One of the biggest concerns about HECM reverse mortgages is whether they will leave heirs with financial burdens. Fortunately, HECM loans are non-recourse, meaning the lender cannot demand repayment beyond the home's value. If the home's sale does not cover the full loan amount, the difference is covered by the Federal Housing Administration (FHA) insurance.

However, if heirs want to keep the home, they must settle the loan using available funds or a new mortgage. Planning ahead can help heirs navigate this process smoothly.

How Can Heirs Avoid Foreclosure?

If heirs do not act within the lender’s timeframe (typically 6-12 months), foreclosure may occur. To prevent this:

• Communicate with the lender immediately after the borrower’s passing.
• Request an extension if needed to explore options.
• Decide early whether to sell, refinance, or surrender the property.

How Can Borrowers Prepare Their Heirs for a Reverse Mortgage?

Homeowners considering a HECM reverse mortgage should inform their heirs of the loan's implications. Steps to take include:

• Discussing the loan terms: Ensure heirs understand the loan balance and repayment requirements.
• Creating a financial plan: If heirs wish to keep the home, they should be financially prepared to pay off the loan.
• Maintaining home value: Proper home maintenance can maximize the property’s worth and provide better options for heirs.

Final Thoughts

A HECM reverse mortgage can provide financial relief for retirees but also affects heirs. By understanding repayment options, planning ahead, and communicating with the lender, heirs can navigate the process without financial strain. If you're considering a proprietary reverse mortgage, be sure to review terms carefully to protect your estate and loved ones.

Planning ensures that your heirs will be prepared, minimizing stress and financial burden when handling your home’s future.