Some types of mortgages, often referred to as assumable mortgages, can be transferred from one borrower to another. Reverse mortgages are not one of them. This article explains why they aren’t transferable and explores some other options.
- A reverse mortgage can’t be transferred to another borrower.
- However, co-borrowers on the mortgage can keep it and remain in the home.
- Certain non-borrowing spouses are also eligible to remain in the home, although they won’t receive further payments from the reverse mortgage.
- Other heirs must repay the mortgage, either by selling the home or buying it themselves.
Why Reverse Mortgages Can’t Be Transferred
Reverse mortgages are carefully tailored to each borrower. That helps reduce the risks to the Federal Housing Administration (FHA), which insures the most common type of reverse mortgage, known as a home equity conversion mortgage (HECM). The major risk is that the borrower will receive more money from the loan than their home is worth when it is eventually sold, leaving the FHA to make up the difference to the lender. That could happen, for example, if the borrower has chosen to receive monthly payments for life (one of the several ways that a reverse mortgage can be structured) and ends up living a lot longer than the lender might reasonably have expected.
To help mitigate against that risk, reverse mortgages are based not only on the equity that the borrower has accumulated in the home but the age of the borrower (or borrowers) when the loan is issued. The older the borrowers, the larger a percentage of their equity they can borrow against and the lower the interest rate on the loan is likely to be.
If more than one borrower is listed in the loan, such as a married couple, or if the loan lists an eligible non-borrower (explained below, under Options for Surviving Spouses and Partners), it is the younger person’s age than figures in the calculation.
Borrowers must pay for the FHA insurance: 2% of the loan balance initially, plus 0.5% of the outstanding balance every year thereafter. Because the outstanding balance on a reverse mortgage will grow over time, the annual insurance premium (in dollar terms) will rise, as well.
The borrower’s heirs also receive some protection against the possibility that the mortgage balance will one day exceed the value of the home. While they are required to pay off the loan, they will not have to pay more than the loan balance or 95% of the home’s appraised value, whichever is less.
Options for Surviving Spouses and Partners
Normally, when a reverse mortgage borrower dies, moves out of the home for more than 12 consecutive months (such as into an assisted living facility), or sells the home, the loan must be paid off within a certain period.
However, if their spouse or partner is listed as a co-borrower on the mortgage contract, that person may continue to live in the home and also continue to receive payments from the loan.
For a spouse or other partner to qualify as a co-borrower, they must also be at least 62 at the time the loan was taken out. Spouses who were under 62 at that point can be listed on the loan as eligible non-borrowing spouses. If they meet all the requirements, they are also entitled to remain in the home after their spouse dies, but they won’t receive further payments from the loan.
The loan balance will finally come due when the last co-borrower or eligible non-borrowing spouse no longer lives in the home.
Spouses who aren’t co-borrowers and who don’t meet the requirements for eligible non-borrowing spouses are referred to as ineligible non-borrowing spouses. (For example, to be considered eligible, the spouse must have lived in the home at the time the loan closed and still be living in it as their principal residence, among other requirements.) Ineligible non-borrowing spouses can remain in the home only if they pay off the reverse mortgage.
Note that these rules apply to HECMs originated on or after Aug. 4, 2014. Somewhat different rules apply to older HECMs.
A spouse or other partner who wants to qualify as a co-borrower on a reverse mortgage must also be at least 62 at the time the loan was taken out.
Options for Other Heirs
Non-spouses who inherit a home with a reverse mortgage must pay off the loan within 30 days of receiving a due and payable notice from the lender, although they can request an extension of up to a year in order to sell the home or obtain financing so they can buy it themselves. They also have the option of simply turning the home over to the lender to satisfy the debt.
As mentioned above, the law limits the heirs’ liability in repaying the loan to the lesser of the loan balance or 95% of the home’s appraised value. The FHA insurance will pay the lender the difference.
Who Is Considered a Spouse for Reverse Mortgage Purposes?
For someone to qualify as a spouse under the rules that apply to eligible non-borrowing spouses, they must be legally married to the borrower according to the laws of the state where they reside or where the ceremony took place and have remained married. For different-sex couples, they must have been married at the time the HECM was issued. Same-sex couples who were legally prohibited from marrying at the time the HECM was issued can qualify as spouses if they married subsequently.
How Can I Find a HUD-Approved Housing Counselor?
The Consumer Financial Protection Bureau has a Find a Housing Counselor search tool on its website for locating a HUD-approved counselor in your area. You can also call (800) 569-4287.
Are All Reverse Mortgages Insured by the FHA?
No, the Federal Housing Administration only insures home equity conversion mortgages (HECMs) issued by FHA-approved lenders. Some lenders offer their own proprietary reverse mortgages, and some state and local governments and nonprofits offer single-purpose reverse mortgages. FHA-insured mortgages, however, represent the bulk of the market.
The Bottom Line
Reverse mortgages can’t be transferred from one borrower to another. The loan will generally have to be repaid soon after the borrower dies, moves out for 12 consecutive months, or sells the home. However, spouses or partners who are co-borrowers or, in some cases, spouses listed as eligible non-borrowers on the loan agreement can remain in the home, and the loan will not have to be repaid until their death.
These rules can be complicated, so spouses and other heirs are well-advised to call the lender, loan servicer, and/or a HUD-approved housing counselor as soon as possible to find out the steps they need to take.