Selling a Home with a Reverse Mortgage: Things You Should Know

Financial planning for senior homeowners in the United States was changed forever in 1988 when the Home Equity Conversion Mortgage (HECM) program was created. Reverse mortgages have allowed millions of seniors to access the equity in their homes without making monthly payments. But when the homeowner passes away, the heirs and the estate face specific obligations.

How Reverse Mortgages Work

A reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity into cash. Unlike a traditional mortgage, the borrower makes no monthly payments. Instead, the loan balance grows over time as interest accrues. The loan becomes due when the last surviving borrower permanently leaves the home, whether through death, sale, or relocation.

What Happens When the Homeowner Dies

When the last surviving borrower dies, the reverse mortgage becomes due and payable. The lender will send a Due and Payable notice to the estate. The heirs have a limited time to either sell the property, pay off the loan with other funds, or turn the property over to the lender. The timeline varies, but typically the estate has 30 days to notify the lender and several months to resolve the loan.

The Non-Recourse Protection

One of the most important features of a reverse mortgage is its non-recourse nature. This means the borrower and the estate will never owe more than the home's fair market value at the time the loan is repaid. If the loan balance exceeds the property's value, the difference is covered by the FHA insurance fund. The heirs are never personally liable for the shortfall.

Selling the Property

The most common resolution is to sell the property. The sale proceeds are used to pay off the reverse mortgage loan. If the sale price exceeds the loan balance, the difference goes to the estate. If it falls short, the non-recourse protection covers the gap. The personal representative must work with the lender to coordinate the payoff and ensure a smooth closing.

If you are dealing with an estate that includes a reverse-mortgaged property, reach out for guidance. Marc Cormier understands the specific requirements of reverse mortgage resolutions and can help the estate navigate the process efficiently.