What happens to your reverse mortgage when you die?

One rule decides what becomes of a reverse mortgage when you die: the HECM falls due once the final borrower dies. To keep the home, heirs pay no more than 95% of its appraised value. If they sell, any money left after the balance is paid is theirs. FHA insurance covers any gap when the home's value is less than the debt.

The debt itself does not pass to the heirs. Along with the home, they inherit the right to choose what to do with it.

What happens first

1. The servicer usually learns about the death from the family or public records.
2. The estate or heirs receive a "due and payable" notice from the servicer.
3. The heirs tell the servicer their plan: keep, sell or hand over the home.
4. For the 95% rule, the servicer orders an appraisal to determine the home's value.

Make an early call to the servicer, even before the notice arrives. Request the payoff figure in writing and ask for one contact person's name.

• Home value set at $450,000
• Loan balance, increasing by 7.23% each year

What heirs can do

• Keep the property. The amount to pay is 95% of the appraised value or the loan balance, whichever is less. Most heirs keep the home by paying with their own money or taking out a new regular mortgage.
• Sell the property. Use the sale money to repay the balance, and keep what remains. When the sale proceeds fall below the balance, the CFPB explains that heirs owe the lesser of the full balance or 95 percent of the appraised value.
• Give the home back. Sign a document called a deed in lieu of foreclosure. Heirs leave the property and owe nothing more.

A chart in the default example compares the loan balance with the home's value. The 95% rule becomes important when the two lines cross. If heirs keep the home, they pay the lower amount; if they sell, they owe no more than the sale price.

How long heirs have

The CFPB states that heirs have 30 days after receiving the due and payable notice to buy, sell or turn over the home. Heirs may ask the servicer for more time if they are actively selling or arranging a loan. Make the request in writing and include proof, such as a listing agreement or lender letter.

The servicer may begin foreclosure if the heirs do nothing. That outcome does not leave heirs owing money, although it can take away any equity that the family could have kept.

Reverse mortgage problems for heirs

Heirs cannot owe more than the home is worth, but handling the process can still be hard:

• Slow replies from the servicer. Record each call and letter in writing.
• Disputes over the appraisal. Ask how it was done when the appraisal looks low or high. The appraisal sets the 95% figure.
• Delays during probate. The estate may need legal permission before selling the home. Let the servicer know when probate begins.
• Upkeep and repair work. Insurance and maintenance must continue until the home is sold.
• Only a little equity remains. Once many years have passed, the balance may take most of the home's value or all of it.

The non-borrowing spouse

If a spouse is not on the HECM, that person is a non-borrowing spouse. What follows depends on whether the loan closed with that person named as an eligible non-borrowing spouse.

• Non-borrowing spouse who qualifies. After the borrower dies, they can usually remain if it is their main home and the taxes, insurance and upkeep are paid. The spouse cannot draw more money from the loan.
• Does not qualify. The loan falls due just as it does for any heir. The CFPB notes that in some cases, a non-borrowing spouse may request a foreclosure delay of up to 180 days.

Before you sign, ask the lender and the counselor how protection will apply if your spouse is under 62.

Can you sell a house with a reverse mortgage?

At any time, yes. While you are alive, you can sell. The sale first pays off the balance. After you die, your heirs may sell the home. The CFPB explains that, after the loan becomes due and payable, the home may sell for 95 percent of the appraised amount, even when this is less than the balance.

Foreclosure on a reverse mortgage

Foreclosure can also happen to a HECM before death. These are the usual reasons:

• unpaid homeowners insurance or property taxes
• failure to keep the home in repair
• According to DC's regulator, one reason is the last borrower moving out or staying away for health reasons for more than 12 months.

The Congressional Research Service found that at one point, about 10% of HECM borrowers had not paid property taxes or insurance. That share covered about 54,000 loans. Keeping those bills paid is what prevents the loss of the home.

How to prepare now

1. Tell your heirs that you have a HECM and provide the servicer's name.
2. Store copies of your loan papers with your will.
3. Give legal authority to the person you name to handle the house.
4. Review the balance listed on your loan statements to avoid surprises.
5. Open the calculator and select its "What heirs keep" tab to learn when your loan balance may exceed the home's value.

Questions people ask

1. Can heirs choose to walk away from a reverse mortgage?

   They can. Using a deed in lieu of foreclosure, they can transfer the home to the servicer and owe nothing further, even when the balance exceeds the home's value.

2. After death, what deadline applies to paying off a reverse mortgage?

   After the due and payable notice arrives, heirs have 30 days to state their choice. They may ask for extra time if selling or arranging a loan.

3. After death, who is responsible for the reverse mortgage?

   Responsibility rests with the estate. Heirs do not owe the debt personally. Only the home is used to repay it.

4. Would a reverse mortgage make sense if no one will inherit?

   It can be: using the equity is the main cost of a HECM. If no one will inherit the house, that cost has less importance.

5. Can a spouse who did not borrow stay in a home with a reverse mortgage?

   When an eligible non-borrowing spouse is named at closing, they can usually stay. This requires the home to remain their main residence and its bills to be paid.

6. How does a reverse mortgage work when you die?

   The loan comes due, and no more money can be drawn. Interest keeps adding up until the balance has been paid. The house is sold, kept or handed back. FHA insurance covers any part of the balance left unpaid.