What Happens to a Reverse Mortgage When You Die?
A reverse mortgage is a smart financial tool that homeowners who are age 62 and older can use to access the equity in their homes.
If you are considering a reverse mortgage as a way to supplement your income or offset costs in your retirement, it’s important to understand the different types of reverse mortgages that are available.
Because it is common for homeowners to have a reverse mortgage until they die, one common question is: what happens to the reverse mortgage when that day comes?
The outcome will depend on whether there is a surviving spouse or not.
Keep reading to learn about what to expect depending on each possible situation.
Home Equity Conversion Mortgage (HECM)
The Home Equity Conversion Mortgage, or HECM, is the most widely used type of reverse mortgage.
In order to qualify for a HECM reverse mortgage, homeowners must be 62 years of age or older, live in their home as their primary residence, live in the home full-time, and continue to pay homeowner’s insurance, property taxes, maintenance costs, and any other required fees such as Homeowner’s Association fees.
A HECM reverse mortgage gives homeowners the option to obtain the equity in their home as a lump sum, monthly payments, a line of credit, or a combination of the three.
The homeowners receive the money tax-free, and there are no limits on how they may use the money. Homeowners have used reverse mortgage funds for a variety of purposes such as supplementing their monthly income, upgrading their homes, traveling, and saving for a rainy day.
HECM reverse mortgages are federally insured by the Federal Housing Administration (FHA). The FHA places a limit on how much homeowners may borrow based on the equity and the age of the borrower. There are also other guidelines that the FHA has created that are designed to protect borrowers.
First, only lenders that are approved by the FHA may offer HECM loans.
Second, before applying for a HECM reverse mortgage, homeowners must first complete a counseling session with a counselor approved by the U.S. Department of Housing and Urban Development (HUD). The third-party counselors help ensure that homeowners make the right choice for their situation.
Third, with a HECM reverse mortgage you have a right to cancel at any time during the application process and within three days after you sign the closing documents.
Fourth, a HECM reverse mortgage is a non-recourse loan which means that homeowners will never owe more than the value of the home or the initial borrowed amount.
To find a HECM reverse mortgage, check out our list of recommended reverse mortgage lenders here.
Proprietary Reverse Mortgages
The next type of reverse mortgage is the proprietary reverse mortgage. These are sometimes called jumbo reverse mortgages, or they are white labeled by lender with a unique name.
Proprietary reverse mortgages are developed by individual lenders for homeowners who want to borrow more money and have a home that is worth more than the FHA limit, which is currently $970,800.
In some states, lenders can offer proprietary loans to those who are as young as 55 years old.
These mortgages are very similar to HECM reverse mortgages. However, the one main difference is that they are not backed by the FHA and they yield a higher interest rate.
Some lenders may require third-party counseling before completing the reverse mortgage application, which may help with understanding the various costs and benefits of a proprietary reverse mortgage versus a HECM reverse mortgage.
Similar to a HECM, homeowners have the choice of receiving their funds as a lump sum, monthly payments, a line of credit, or a combination of the three.
One advantage to proprietary loans not being FHA-insured is that homeowners do not have to pay mortgage insurance premiums (MIPs).
Most major HECM reverse mortgage lenders also offer a proprietary reverse mortgage.
To find a proprietary reverse mortgage, we recommend starting with our list of recommended reverse mortgage lenders.
Single-Purpose Reverse Mortgages
The last type of reverse mortgage are single-purpose reverse mortgages. They are also known as property tax deferral programs and deferred payment loans.
Single-purpose reverse mortgages are only available to homeowners who are 62 or older.
As the name implies, single-purpose reverse mortgages may only be used to pay for one thing, and the purpose it is being used for must be approved by the lender.
The types of expenses that they are typically approved for are property taxes, home insurance premiums, and home repairs and renovations.
Single purpose reverse mortgages are obtained through state and local government agencies and non-profit organizations, but they can be difficult to find because they are not available in all states.
The loan is repaid when the homeowners move, sell the property, stop paying property taxes, stop paying homeowner’s insurance, or the homeowner is deceased.
To find a single-purpose reverse mortgage, the Federal Trade Commission (FTC) recommends going to your local Area Agency on Aging, which can be found by going to eldercare.acl.gov or by calling 800-677-1116.
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