Inheriting a home is a significant event, but it can come with unique challenges if the house has a reverse mortgage. Reverse mortgages allow homeowners, typically seniors, to borrow against their home’s equity. While this can provide them with financial relief during their lifetime, it can create complications for heirs after their passing.
If you inherit a house with a reverse mortgage, it’s crucial to understand your options, the timeline involved, and what responsibilities you may need to assume. This guide will explain everything you need to know about what happens when you inherit a house that has a reverse mortgage.
What Is a Reverse Mortgage?
A reverse mortgage is a loan that allows homeowners, usually aged 62 or older, to borrow against their home’s equity without making monthly payments. Instead of the homeowner paying the lender, the lender makes payments to the homeowner. This loan is repaid only when the homeowner sells the property, moves out permanently, or passes away.
The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). Homeowners can receive their reverse mortgage funds in a lump sum, monthly payments, or as a line of credit.
What Happens to a Reverse Mortgage When the Homeowner Dies?
When a homeowner with a reverse mortgage passes away, the loan becomes due and payable. The heirs of the property must decide how to proceed with the loan and the house. There are several options available, but the timeline for acting is important.
The reverse mortgage lender will typically notify the heirs that the loan is due, and they will have 30 days to respond. Heirs generally have up to six months to either repay the loan or sell the home, with extensions sometimes available.
Your Options as an Heir
When you inherit a house with a reverse mortgage, you have several options. The best course of action will depend on your financial situation, the amount of the reverse mortgage balance, and what you want to do with the property.
1. Repay the Loan and Keep the Home
If you want to keep the home, you’ll need to repay the reverse mortgage loan. The amount you’ll owe is typically the loan balance or 95% of the home’s appraised value, whichever is lower. This is known as the non-recourse aspect of reverse mortgages, which protects heirs from owing more than the home is worth, even if the loan balance exceeds the property value.
Ways to repay the loan include:
- Paying the loan balance using personal savings or other funds
- Refinancing the home with a traditional mortgage
- Using funds from the estate if sufficient
Once the reverse mortgage is repaid, you’ll own the house free and clear.
2. Sell the House to Repay the Loan
If you don’t want to keep the house or can’t afford to repay the loan, selling the property may be your best option. By selling the house, the proceeds from the sale will go toward paying off the reverse mortgage.
If the house sells for more than the loan balance, the remaining proceeds go to the heirs. If it sells for less than the loan balance, the lender can’t pursue the estate or the heirs for the remaining debt thanks to the non-recourse clause. The sale of the home satisfies the loan.
3. Deed the Property to the Lender
If you do not want to keep the home or go through the process of selling it, you have the option to deed the property back to the lender. This process is known as a deed in lieu of foreclosure. It allows you to transfer ownership to the lender and be free from the responsibility of the reverse mortgage, avoiding foreclosure.
While you won’t receive any proceeds from the home, this option can provide a quick resolution if you don’t wish to keep the property.
Important Considerations When Inheriting a Home With a Reverse Mortgage
Inheriting a home with a reverse mortgage comes with several key factors that you’ll need to consider before making a decision:
1. Reverse Mortgage Balance
The first thing you should determine is the balance owed on the reverse mortgage. This will include the total amount borrowed, plus any accrued interest and fees. The balance grows over time, as interest and fees accumulate.
Contact the reverse mortgage lender to get the exact amount due.
2. Appraised Value of the Home
The next step is to determine the current market value of the home. This can help you decide whether to repay the loan and keep the home or sell the property. If the home’s value is less than the reverse mortgage balance, selling may be more practical.
Lenders often require an appraisal as part of the process to confirm the home’s value, especially if the heirs wish to repay the loan at 95% of its appraised value.
3. Timeframe to Act
Heirs usually have six months to resolve the reverse mortgage after the borrower passes away. During this time, you must decide how to handle the loan—whether to repay it, sell the house, or surrender it to the lender. Extensions may be available, but it’s important to communicate with the lender and act within the required timeframe.
4. Home Maintenance and Costs
If you decide to keep or sell the home, remember that you’ll be responsible for any property maintenance, insurance, and taxes during the process. These costs can add up, so be sure to factor them into your decision-making process.
What Happens If You Do Nothing?
If the heirs do not take any action after inheriting a home with a reverse mortgage, the lender will eventually foreclose on the property. Foreclosure means the lender will take possession of the house and sell it to recover the reverse mortgage balance. Heirs will lose the opportunity to keep or sell the house themselves.
While foreclosure is a last resort, it’s important to stay in communication with the lender to avoid this outcome. Acting promptly gives you more control over the situation and the potential to maximize the value of the inherited property.
Steps to Take if You Inherit a House With a Reverse Mortgage
Here are the key steps you should follow if you inherit a house with a reverse mortgage:
- Contact the Lender: Notify the lender as soon as possible after the homeowner’s passing. The lender will provide information about the loan balance, timeline, and your options.
- Review the Loan Documents: Gather all paperwork related to the reverse mortgage to understand the terms and conditions.
- Get the Home Appraised: Obtain an appraisal of the home’s current market value. This will help you determine whether to repay the loan, sell the property, or hand it over to the lender.
- Decide on a Course of Action: Based on the loan balance, the home’s value, and your financial situation, decide whether you want to keep, sell, or surrender the house.
- Communicate with the Lender: If you need more time or are considering different options, communicate with the lender to request an extension or seek guidance on the next steps.
Conclusion
Inheriting a home with a reverse mortgage can be complicated, but understanding your options can help you make an informed decision. Whether you choose to keep the house, sell it, or deed it back to the lender, acting quickly and staying in communication with the lender is key to managing the situation.
By following the steps outlined in this guide, you can navigate the process of handling a reverse mortgage on an inherited home and make the best choice for your financial future.