Josephine Norton
A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that becomes payable when the last surviving borrower passes away or moves out of the property. The loan does not determine which heirs will inherit the property, but rather, the property owner's will or trust. Heirs are not personally liable for any deficiency if they decide to let the lender foreclose on a home that is underwater. There are several options for heirs to handle a HECM loan repayment, including keeping the home by paying the mortgage balance or 95% of the property's appraised value, or signing over the title to the lender.
| Characteristics | Values |
|---|---|
| When does the loan become payable? | When the last surviving borrower passes away or moves out of the property |
| What happens if the borrower has a spouse? | If the spouse is a co-borrower, they don't have to pay back the mortgage until they both move out or die. If the spouse is not a co-borrower, they may have to repay the loan within 30 days of the last date the borrower lived in the home. |
| What happens if the HECM was issued before August 4, 2014? | The non-borrowing spouse doesn't have a guaranteed right to stay in the house. The lender may choose to start foreclosure proceedings or allow the spouse to stay in the house. |
| What happens if the HECM was issued after August 4, 2014? | An eligible non-borrowing spouse can stay in the home after the borrowing spouse moves out or dies, but only if they were married to the borrower at the time the loan was issued, were named as a spouse in the HECM documents, and lived in the home as their primary residence when the loan originated. |
| What are the repayment options for heirs? | Heirs can choose to keep the home by paying the lesser of the mortgage balance or 95% of the property's appraised value. They can also sell the home for 95% of its appraised value and use the proceeds to pay off the HECM. Another option is to sign over the title and complete a deed in lieu of foreclosure, which prevents the foreclosure of the home. |
| What happens if the heirs choose to do nothing? | If heirs choose to do nothing, the lender will foreclose on the home. However, heirs will not owe more than the value of the home even if the loan balance exceeds it. |
What You'll Learn
Heirs' rights and responsibilities
A HECM, or Home Equity Conversion Mortgage, is a government-insured reverse mortgage program offered through the FHA. It is a common type of reverse mortgage, but it is not the only option. A reverse mortgage allows you to borrow money using your primary residence as collateral without the burden of making mandatory monthly mortgage payments.
The rights and responsibilities of heirs depend on several factors. If there is a surviving spouse, they are protected in a reverse mortgage and may continue to live in the home as long as qualifying conditions are met. The Reverse Mortgage Stability Act introduced reforms that benefit and protect the interests of non-borrowing spouses. If the non-borrowing spouse was married to the borrower at the time of their death and meets other criteria, the loan repayment will be deferred.
If there is no surviving spouse, heirs have several options. They can choose to pay off the loan and keep the property, or sell the house and pay off the loan, retaining any leftover money. Heirs can also choose to deed the property back to the lender, meaning they release the property and the lender becomes the new owner. This option allows heirs to walk away from the property without further financial obligations.
It is important to note that heirs will never owe more than the property is worth and they will never be forced to sell their assets to cover the debt. If they sell the home for more than the balance of the reverse mortgage, they can keep the remaining equity as proceeds.
To qualify for a HECM loan, borrowers must meet several requirements, including being 62 years or older and having significant home equity. Before applying for a HECM loan, borrowers must complete reverse mortgage counseling to ensure they fully understand the loan terms, obligations, and benefits. It is also recommended to have a will in place before taking out the reverse mortgage to ensure that your wishes regarding your assets and liabilities are clear.
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Non-borrowing spouses' rights
The Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that is FHA-insured. In a reverse mortgage, the borrower receives payments in the form of monthly payments, lines of credit, or lump sums, and the loan must be paid off when the borrower dies.
When the last surviving borrower of an HECM loan passes away, the loan balance becomes due. At this point, the non-borrowing spouse may not withdraw any unused loan funds, but FHA mortgage insurance premiums and service fees will continue to accrue on the unpaid principal balance.
If the HECM loan was originated before August 4, 2014, the non-borrowing spouse could be asked to repay the loan immediately upon the borrower's death. However, for FHA-backed HECM loans issued on or after August 4, 2014, the non-borrowing spouse may remain in the home after the borrower's death, and the loan repayment will be deferred, provided that certain conditions are met. These conditions include the non-borrowing spouse being named in the loan documents as a spouse, the HECM not being in default for any other reason, and the spouse having "good, marketable title" to the property or another legal right to remain in the property.
It is important to note that the non-borrowing spouse is not allowed to withdraw any unused loan funds after the borrower's death. Additionally, if the non-borrowing spouse chooses to remain in the home, FHA mortgage insurance premiums and service fees will continue to accrue on the unpaid principal balance.
In summary, while the specific rights and options available to a non-borrowing spouse in an HECM loan depend on the loan's origination date and other factors, the updated HUD policy provides more protection and flexibility for surviving spouses.
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Repayment options
If the borrower passes away, the loan becomes due and payable. The HECM loan balance becomes due and payable upon the death of the last surviving borrower. At this point, the non-borrowing spouse may not withdraw any unused loan funds, but FHA mortgage insurance premiums and service fees will continue to accrue on the unpaid principal balance.
If the borrower has a spouse, they may be able to remain in the home and defer loan repayment if certain criteria are met. These criteria include being married to the borrower at the time of their death, disclosing their spousal status at the origination and closing of the loan, and being named in the HECM documents.
Heirs of a HECM borrower have several options for handling the loan repayment. They can choose to keep the home by paying the lesser of the mortgage balance or 95% of the property's appraised value. They can also sign over the title and complete a deed in lieu of foreclosure, which involves signing the property title over to the lender to satisfy the debt and prevent foreclosure.
Heirs may also choose to make a short sale, selling the house for 95% of its appraised value and using the proceeds to pay off the HECM. This option is known as a "short sale" and is often used when the loan balance is higher than the home's value. Alternatively, heirs can do nothing, in which case the lender will foreclose on the home. However, it is recommended that heirs communicate with the lender about their options to avoid unnecessary charges.
It is important to note that heirs will not take on any personal debt to satisfy the loan balance and will not owe more than the value of the home. Any remaining funds after selling the property go to the heirs.
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Foreclosure
Firstly, it is important to note that a reverse mortgage becomes due and payable when the last surviving borrower passes away or moves out of the property. If the borrower is still living in the property, repayment can be deferred until their death. In addition, if an FHA-backed reverse mortgage was issued after August 4, 2014, and certain criteria are met, the non-borrowing spouse may remain in the home and have the loan repayment deferred.
To avoid foreclosure, heirs have several options. They can choose to keep the home if they can afford to repay the loan, or they can sell the home and keep the remaining equity after repaying the loan. If there is no excess equity, heirs can deed the property back to the lender, allowing them to walk away without further financial obligations. This option should be considered carefully, as it may not be in the heirs' best financial interests. Another option is to provide a deed in lieu of foreclosure, which avoids the legal fees associated with foreclosure proceedings and does not impact the heirs' credit score.
If the borrower or their heirs fail to make necessary repairs, fall behind on property taxes, or default on insurance, the loan can become due and payable before the borrower passes away or moves out. In this case, foreclosure may be initiated by the lender. It is important for borrowers and heirs to understand their rights and responsibilities to avoid this outcome. Consulting with an estate attorney or a licensed attorney specializing in foreclosure laws can help clarify the options and protect the interests of all parties involved.
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Probate court
When the last borrower on a HECM loan passes away, the loan becomes due and payable. The heirs of the borrower will not take on any personal debt to satisfy the loan balance, but the estate will continue to accrue interest and fees until the loan is closed. To avoid unnecessary charges, heirs should contact the loan servicer as soon as possible to determine the outstanding balance on the mortgage.
If there are no directives such as a will or trust, probate court will likely need to determine the distribution of assets. It is recommended that the heirs contact an estate attorney to establish heirship rights and determine the next steps.
There are several options available to the heirs for handling the repayment of the loan:
- Repay the loan: Heirs may choose to keep the house by repaying the loan. They will need to pay the lesser of the mortgage balance or 95% of the property's appraised value.
- Sign over the title: With the lender's approval, heirs can sign the property title over to the lender, accompanied by a deed in lieu of foreclosure. This satisfies the debt and prevents the foreclosure of the home.
- Short sale: Heirs can satisfy the loan by selling the house for 95% of its appraised value and using the proceeds to pay the HECM. Even if the sale does not cover the full balance of the loan, the FHA does not allow lenders to pursue borrowers or their heirs for the difference.
- Deed in lieu of foreclosure: If the heirs inherit a house with a loan balance higher than its value, they may decide to hand ownership of the home over to the lender using a deed in lieu of foreclosure. This option avoids the long and costly foreclosure process and will not hurt the heir's credit score.
- Do nothing: If heirs choose to do nothing, the lender will foreclose on the home. However, since HECMs are non-recourse, heirs will not owe more than the value of the home, even if the loan balance exceeds it.
It is important to note that if the HECM loan was originated before August 4, 2014, a non-borrowing spouse does not have a guaranteed right to stay in the house. The lender may choose to start foreclosure proceedings or permit the spouse to stay in the home under certain conditions. However, if the loan was issued after August 4, 2014, an eligible non-borrowing spouse can stay in the home after the borrowing spouse's death, provided they meet specific criteria.
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Frequently asked questions
When the last borrower on a HECM loan passes away, the loan becomes due and payable. The payoff process depends on when the borrower(s) stop living in the home that secures the loan.
If the non-borrowing spouse meets certain criteria, they can remain in the home after the borrower dies. This includes being married to the borrower at the time of the loan's origination, being named in the HECM documents, and living in the home as their primary residence when the loan originated.
Heirs have multiple options for handling the repayment of a HECM loan, including keeping the house by paying the mortgage balance or 95% of the property's appraised value, signing over the title to the lender, or selling the home for less than the loan balance in a short sale.
