What Happens to My House After a Reverse Mortgage?
One question that frequently arises — and is a subject of misconceptions — is what happens to a house after a reverse mortgage (Home Equity Conversion Mortgage) ends. Some people believe the bank automatically owns the house, but that isn’t necessarily the case. Homeowners and their heirs have options, so it’s important for them to understand what they can do.
Jack Guttentag, finance professor emeritus at the Wharton School, published a recent article “What Happens to the House that Secures a Reverse Mortgage” on his Mortgage Professor website. Guttentag’s article lays out the options available to homeowners and their heirs after a reverse mortgage, and it provided the basis for our infographic below. In his article, Guttentag makes clear up front that the information he presents applies strictly to HECM reverse mortgages insured by the Department of Housing and Urban Development and the Federal Housing Administration. The same is true for our infographic.
The available options are easily divided into two main categories: if the homeowner is living, or if the homeowner has died. As Guttenberg explains in his article:
Homeowners might change their minds about having a reverse mortgage. Perhaps they simply no longer want the reverse mortgage, or they’ve decided not to remain in the home. Homeowners in these circumstances have two options:
- The homeowner can repay the loan and keep the home.
- The homeowner could sell the home, repay the balance on the reverse mortgage and keep any remaining proceeds from the sale.
If the homeowner has died, the heirs’ options will vary depending on whether the home still has equity remaining or if it has incurred debt:
- For a home with considerable equity, the heirs can choose either to keep the home or sell it.
- To keep the home, the heirs must repay the loan. This option requires considerable communication with the loan servicer. If the heirs want to keep the house, they must inform the servicer of their intentions. In this case, the heirs may have up to a year to repay the loan. Guttentag points out that interest and insurance payments will continue during the repayment period, so it’s in heirs’ interest to repay the loan as quickly as possible.
- If the heirs prefer to sell the home, they must repay the reverse mortgage balance. If funds remain after the loan is repaid, those proceeds will go to the heirs.
- For a home that has incurred debt, heirs also have two options:
- If the heirs don’t want the house, they can choose to allow foreclosure proceedings. Neither the heirs nor the homeowner’s estate will be responsible for the debt.
- If the heirs want the house, they can repay the reverse mortgage loan at 95 percent of HUD’s appraised value minus closing costs and the Realtor’s commission.
- A third option when a homeowner has died applies to non-borrowing spouses who reside in the home as a permanent residence:
- The non-borrowing spouse can remain in the home indefinitely as long as the property taxes and homeowner’s insurance are kept up to date and the house is maintained properly.
- Other heirs don’t have recourse, such as prompting the non-borrowing spouse to leave the home, after the homeowner/borrower has died.
Infographic: What happens to my house after a Home Equity Conversion Mortgage (HECM)?