My mother died two weeks ago with a reverse mortgage and the mortgage insurance (MIP) was being charged to her. The reverse mortgage insurance pays off the mortgage at the time of her death. I called the bank a year ago and asked if the MIP would pay off the mortgage and they said yes, but it would be paid to them. So, if they are being paid off then why don’t I get the house? I have papers showing that they were charging my mother the MIP every month. Can you tell me why they get the house if it was being charged to my mother’s account?

The reverse mortgage insurance does not pay off the mortgage at the time of death.  The mortgage insurance premium (MIP) is required on both HECMs and forward mortgages on HUD FHA insured loans that insures the lender against the risk of default.  Like any insurance premium, it is designed to pay the lender against any default by the borrower.  The loan is due and payable when the borrower no longer lives in the home as their primary residence.

As the heir , you have the option to keep the home or sell it and pay off the balance owed on the loan or 95% of the current market value of the home, whichever is less.  If the home is not worth at least as much as your mom owes on the loan or 95% of the current value of the home, there is a loss, and that amount is never owed by your mom’s estate or you or any other heir.  The MIP steps in and pays a claim.

Like all insurance, there may be a claim paid on the loan and there may not.  In any case, you are thinking about a specialized type of life insurance that is called mortgage cancellation insurance where the policy pays a benefit in the amount of the loan balance when the insured passes and this is not the MIP on a government loan.  The Mortgage Insurance Premium for an FHA loan is there to pay off any shortfall if a borrower defaults or when the loan is repaid at the end of the term.

If you want to keep the home, the MIP guarantees that you will not be required to pay off more than 95% of the current value of the home, regardless of how much your mom owed on the loan.  This was beneficial to many during the market downturn in 2009 – 2015.  Many homes lost as much as 50% of their value but borrowers, their estates and their heirs did not have to pay a dime even though their loans were upside down in some instances by several tens of thousands of dollars.  The Mortgage Insurance fund paid those losses.

Since it is not a life insurance policy, it does not pay when the borrower passes but rather if there is an incidence of default and there are not sufficient funds to pay the reverse mortgage lender and the investors who bought the bonds making the loan available for the borrowers.  If there is no loss, then the insurance does not pay out.  Do not think of it as an automatic death benefit but more like a hedge against a loss in case of default.  Think of it like health or car insurance.  if you have automobile insurance and you never get into an accident, the insurance company does not pay off your car and give you the car.

The same is true for the reverse mortgage insurance MIP.  But also, the borrower pays the MIP to insure the lender and the investors who make the funds available for them do not incur losses and the benefit that the borrower receives is that the loans are then available.  Without MIP insurance on the loan, no one would be willing to risk their funds on such a venture and borrowers would not be able to obtain reverse mortgages.

I do not know who you spoke with at the bank that told you the MIP would pay off the loan at the time of death but if that is what they said and it wasn’t a misunderstanding between the two of you, that was an unbelievably incorrect answer.  If you had an authorization from the borrower to speak to them on her behalf, I’m shocked that anyone would even speak to you regarding the loan if your mom had not given them a written authorization to speak with you on her behalf let alone give such a wrong answer.  I cringe when I hear things like this.

I am sorry if someone either told you something so egregiously wrong or determined early on that you did not have authorization to get any information about the loan and so they just said anything to end the conversation quickly and didn’t take the time to explain the true nature of the Mortgage Insurance Premiums and what they do and what they will not do.

But at this time, you have the right to pay off the loan at the amount owed or 95% of the current loan balance if that is less than the amount owed if you want to keep the home.  You have the right to sell the home if there is equity and you want to keep the equity by using the sale proceeds to repay the outstanding loan balance.

Keep in mind though that you do not have the automatic right to sell to a third party at 95% of the current value and any sale that would result in the payoff of the loan for less than the amount owed must be approved by the lender/HUD as it would result in a loss to the MIP fund.  You also have the right to walk away and owe nothing if you so choose.  The MIP your mom paid will cover all losses and her estate or her heirs will never be required to pay a dime of those losses (if any), but it does not pay off the loan.

FAQ

Q.
What is MIP insurance on a reverse mortgage?

A.
Every reverse mortgage borrower must pay both an Up-Front Mortgage Insurance Premium (UFMIP) and the annual renewal Mortgage Insurance Premium (MIP) that is calculated and accrues monthly on their statement.  The MIP is the premium that insures against the borrower and lender default on a reverse mortgage.  It protects the borrower in that the borrower will never need to worry about whether or not they will receive payments from a lender on the program and it protects their heirs in that no matter how much the borrower borrows or what future values do, the borrower’s heirs will never have to pay more than the amount owed or 95% of the current market value of the home if that is less than the amount owed if they want to keep the property or they can always walk away and owe nothing and the lender cannot look to the borrower’s estate for repayment.

Q.
Who pays the insurance on a reverse mortgage?

A.
The borrower pays for the mortgage insurance on a reverse mortgage just as the borrower pays the mortgage insurance on a forward FHA loan.

Q.
Do all reverse mortgages require mortgage insurance?

A.
All HUD/FHA reverse mortgages require mortgage insurance.  Private programs, also known as proprietary or jumbo loans do not require mortgage insurance but their interest rates are also usually much higher.

Q.
What is the cost of insurance on a reverse mortgage?

A.
Hazard Insurance is based on hazard insurance companies’ rates and the coverage is comparable to other loan types.  Borrowers should check with their insurance company.  As is the case with most things, it is probably a good idea to get several quotes.

Q.
Is the UPMIP or ongoing MIP tax deductible?<

A.
We cannot give tax advice as tax deductions change.  We always suggest that you contact your tax preparer.

Related:

How Much Time is Allowed to Repay Reverse Mortgage After Death?