How does borrower death affect a HECM reverse mortgage?
HECMs come due after the borrower dies or permanently moves out
- Surviving spouses have six months to pay off the loan (up to 12 months with extensions).
- Surviving spouses may stay in the home indefinitely, if they qualify for a deferral.
- Non-HECM reverse mortgages have their own rules for surviving spouses.
The country's most popular reverse mortgage comes with a hard payoff deadline. A Home Equity Conversion Mortgage (HECM), the reverse-mortgage program administered by the Federal Housing Administration (FHA), must be paid off after the last borrower passes away or moves out of the residence permanently.
Surviving spouses not listed as borrowers or executors of the estate have six months to complete this payoff. An additional six months can be obtained through extensions.
Generally, a reverse mortgage is paid off by selling the home. Any remaining equity from the sale goes to the estate. With an HECM, you are protected if the payoff amount exceeds the current market value of the home. You can never owe more than 95 percent of the appraised value of the house.
The HECM does not come due if a surviving co-borrowing spouse continues to live in the residence. Surviving spouses not listed as co-borrowers on an HECM reverse mortgage, however, must get a deferral to remain in the home. To qualify for this deferral, a nonborrowing surviving spouse must have been disclosed to the lender and named in the original loan documents, remained married to the borrower and have occupied the residence for the entire duration of the loan.
A nonborrowing spouse also must establish legal ownership of the property within 90 days of the borrowing spouse's death and continue occupying the residence, or the HECM will come due. Finally, once the deferral is granted, a surviving spouse must continue to meet all obligations listed in the HECM loan documents — such as paying property taxes, keeping home-hazard insurance current and maintaining upkeep on the home — or the loan can come due, just as it would if the original borrower had not met these obligations.
This can become difficult, however. Even though the loan payment is deferred, a nonborrowing surviving spouse will not get any proceeds from the HECM reverse mortgage because the loan is not assumable. Any household income derived from the reverse mortgage will cease upon death of the last borrower. At that point, the remaining home equity can only be tapped if the house is sold and the reverse mortgage is paid off, or the reverse mortgage is retired with other funds.
An HECM reverse mortgage also comes due when the last borrower listed on the loan permanently moves out the residence — spends more than 12 months living outside the home covered by the reverse mortgage. This can happen if the last borrower enters an assisted-living facility or goes into hospice. In such a case, the loan must be paid off, which can mean that a nonborrowing spouse may have to sell the house and move out if there is no other way to pay back the loan.
Note that these rules only apply to HECM reverse mortgages backed by the FHA. If your spouse obtained a non-HECM reverse mortgage through a private lender, that loan will be governed by the language in the mortgage documents. Check those documents carefully to determine your rights and legal liabilities as a surviving spouse.