What designates the end game for a reverse mortgage and what happens at this point? There is a significant lack of understanding on how a reverse mortgage actually works and how it ends specifically regarding life and death. The easiest way to explain this for a reverse mortgage is to break it out into three separate common scenarios. The first is the end of life for the sole and primary homeowner, the second is the death of the primary spouse, and the third involves a surviving non-borrowing spouse. Each scenario has to be looked at separately to gain an understanding and comfort level with the program.
The first, end of life for the sole homeowner, is pretty straight forward and establishes a template for all three scenarios with regard to property disposition. The property is sold by the estate or turned into the servicing lender. After the sales price, less general selling expenses and the reverse mortgage loan balance, there is either equity that flows to the estate of the deceased or there is a loss on sale that is absorbed by the mortgage insurance fund (MIP). Non-recourse aspects of the loan program apply thereby protecting the estate from loss and insulating the heirs. This is pretty straight forward.
The second, death of the primary spouse, is much less involved. When the primary spouse passes, nothing happens as long as the surviving spouse was originally on the loan and continues to occupy the property. The surviving spouse continues to receive the full benefit of the reverse mortgage including full access to any and all unused residual principal limit or credit line equity etc. The untapped principal limit will continue to compound providing a growing resource of home equity access for the surviving spouse as long as they live.
The third, death of the primary spouse with a surviving non-borrowing spouse, is more technically involved. For purposes of this illustration I am going to be referring to the definition of a non-borrowing spouse pursuant to the August 4, 2014 changes that were mandated by FHA. In this scenario, the non- borrowing spouse is actually on the reverse mortgage loan but did not meet the minimum age of 62 for the program at time of loan origination and closing. When the primary borrower passes this creates an event. The benefits of the reverse mortgage will persist based on the current level of indebtedness on the property but access to any residual available credit will cease from that point forward. In other words, the surviving spouse will not be kicked out of the home. They will be able to stay for as long as they live, but they will not receive the same benefits as outlined in scenario two above.
In summary, this outlines the three common end scenarios most will face with a reverse mortgage. Reverse mortgages can also end when the home can no longer be occupied as a primary residence. One borrower must technically be able to occupy the property as their primary residence for a minimum of one day per year to maintain eligibility. Upon the death of the final borrower, if families wish to keep the home where the indebtedness may exceed the value they have the right to buy the home at 95% of current appraised value. A little clarity always paves the way to understanding. This is especially true with a reverse mortgage so before you bow your head and yield to fear and skepticism just pick up the phone an ask somebody who knows. A reverse mortgage can be a terrific addition to your retirement plan and it can serve to protect your spouse long after you are gone.