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If you’ve recently lost a parent or loved one, you are likely feeling all kinds of emotions right now – shock, sadness, confusion and anxiety, to name a few. Your confusion and anxiety will likely intensify if you get a notice from a lender telling you the home you’ve inherited has a reverse mortgage, and your choices are to pay it off or sell the house.
We can help younavigate what happens when a homeowner dies with a reverse mortgage and explore your options to satisfy the debt.
How Does a Reverse Mortgage Work After the Borrower Dies?
A reverse mortgage allows homeowners age 62 and older to convert some of their home equity into cash. The loan doesn’t need to be repaid until the homeowner dies, moves out of the house or fails to meet loan terms, such as keeping the home in good repair.
For the record, you aren’t automatically responsible for reverse mortgage debt just because you’re an heir. The reverse mortgage loan balance must be repaid, but how it’s repaid will depend on a few factors.
If the homeowner dies and the loan’s remaining balance exceeds the property’s value, the heir(s) isn’t obligated to pay the difference. If they can’t cover the loan amount or don’t want to, the lender can write off the loan. You won’t be responsible for paying back the loan – but you will lose the property. If they’d like to keep the property, they must repay the lower of the amount owed or 95% of the current market value of the property.
When the loan balance is lower than the property’s value, the heirs can then decide to keep the home and make monthly mortgage payments, or they can sell the home to repay the loan and keep any remaining equity.
If a surviving spouse inherits the home, they may be able to stay in the home. This option is typically only available if the spouse is a co-borrower on the mortgage.
Common Reverse Mortgage Problems for Heirs
Repaying a reverse mortgage can be challenging, especially if you didn’t know there was a reverse mortgage on the home in the first place. It can cause a lot of stress for families, including the fear of losing the home if keeping it means coming up with a significant sum of money they don’t have.
Here are some of the most common reverse mortgage problems for heirs:
- Repaying the loan: If you want to keep the property, you usually have up to 12 months to repay the reverse mortgage. Depending on the amount and your savings, it can be a daunting task to collect the funds.
- Lower inheritance amount: The heir’s cash inheritance may be reduced if their loved one used a reverse mortgage to get cash out of their home. If the heir sells the home for more than the remaining loan balance, they will pocket any money left over from the sale, which may be less than they were supposed to inherit.
- Disputes with family members: Reverse mortgages can often be the root of many family feuds. While you may not be on the hook for the outstanding loan balance, you may need to surrender the property to clear the debt. This can lead to disagreements with other family members about what should happen with the property.
- Dealing with bank deadlines: Running up against the clock to sell the property before a lender forecloses can be a stressful task. You may find yourself juggling paperwork and deadlines while you’re grieving your loved one.
What To Do if You’ve Inherited a Reverse Mortgage
You’ve inherited a home with a reverse mortgage, and you just received a notice from a lender. What’s next?
First, don’t panic. Depending on what you want to do with the property, there are several options available.
I want to keep the home
Every home has real estate value – and many homes have sentimental value. Your emotional attachment to the home may move you to pay off the reverse mortgage so you can keep the home.
If you don’t have the funds to pay off the loan, you can refinance the mortgage. To refinance, your lender will verify your income, credit and debt. It can be a lengthy process, but it might be worth the effort if it means keeping a beloved home in the family.
I want to sell the home
After cycling through your options, you may decide to sell the house. After the reverse mortgage is paid back, you can pocket any additional funds if the home sells for more than the reverse loan balance.
Some homes will sell for less than the money owed on the reverse mortgage loan. And because most reverse mortgages are Home Equity Conversion Mortgages (HECMs) secured by the Federal Housing Administration (FHA), the FHA will cover the lender’s shortfall from the sale, and you won’t owe a thing.
I want to walk away from the home
You can walk away if you don’t want to keep or sell the property. Once the lender is informed of your decision, they can initiate the foreclosure process.
If the home is sold in foreclosure, you won’t receive any money from the property’s sale. You also won’t be held responsible for any debt that exceeds the property’s value. So, in a way, you are absolved of any responsibility.
I want to take advantage of loss mitigation
Maybe you still want to keep the property or at least give it up without going through foreclosure. Well, between the lender and the Department of Housing and Urban Development (HUD), you may be able to work something out.
From loan modification to a repayment plan or forbearance agreement, you can stay in your home and make affordable monthly payments that fit your budget.
Deed in lieu of foreclosure
A deed in lieu of foreclosure is another loss mitigation option available to heirs who want to hand over their property to the lender to avoid foreclosure.
This option is mainly initiated if you cannot make the mortgage loan payments or the property is in such a state of disrepair that it’s not worth saving. It is also a better option because it does less damage to your credit than a foreclosure.
What Happens to the Surviving Spouse When a Borrower Dies?
If the homeowner dies and leaves behind a surviving spouse, the spouse is usually protected by the terms of the loan. In most cases, the surviving spouse can remain in the home and continue to receive loan payments from the lender. It’s the “reverse” in reverse mortgages. Instead of the borrower paying the lender, the lender pays the borrower from their converted equity.
If the reverse mortgage is a Home Equity Conversion Mortgage (HECM), the surviving spouse can continue living in the home as long as they meet the reverse mortgage’s requirements.
Here are some general rules around reverse mortgages and spouses or co-borrowers:
- They are a co-borrower on the reverse mortgage loan: If the surviving spouse is a co-borrower, the mortgage isn’t due. They can keep receiving mortgage payouts as long as they live in the home.
- When the reverse mortgage was taken out: Thanks to HUD’s reforms on reverse mortgages, if the reverse mortgage originated on or after August 4, 2014, the surviving spouse can stay in the home even if they are not a co-borrower.
- The marriage at the time the loan was taken out: Depending on whether the couple was married when they took out the reverse mortgage, the surviving spouse’s right to stay in the home could be affected. For example, if they were married when they took out the reverse mortgage but got divorced and one of them remarried, the new spouse would not have the right to stay in the home. Non-borrowing spouses can stay in the home if the reverse mortgage loan originated on or after August 4, 2014.
What To Do if the Reverse Mortgage Is Underwater
An underwater mortgage occurs when you owe more on your loan than what your home is worth.
If this happens with a reverse mortgage, you have several options. You can pay the difference in cash, get a forward mortgage (aka traditional mortgage), sell the property or walk away from it.
You can also try and convince the lender to accept a short sale (when a lender agrees to make less than the outstanding loan balance), grant forbearance or a deed in lieu of foreclosure, modify the loan terms or reduce the loan’s principal.
Timeline for Paying Back a Reverse Mortgage
Losing a parent, grandparent or close relative can be difficult. Add to that the stress of dealing with a reverse mortgage, and a difficult period can begin to feel even more overwhelming.
Suddenly, you have a whole new responsibility – a responsibility you may not be prepared for. To help prepare you as much as possible, we created a timeline of what needs to happen – and when.
The lender will usually send a due and payable notice to you or your family within 30 days of the death of the reverse mortgage homeowner. The notice will outline your options to pay off the loan, such as:
- Selling the property
- Requesting a deed in lieu of foreclosure
- Paying off the outstanding loan balance
If you need more time to sell the home or obtain funding, it’s possible to receive a 90-day extension from the lender by providing documentation proving you are working to do so.
If you plan on selling the home, before the 60-day mark, you will need to appraise the property’s value. The appraisal will give the lender an idea of how much the property is worth and help set a sales price if you opt to sell.
At this time, non-borrowing spouses can apply for a loan payoff deferral if they meet HUD’s marriage, residence, and time of the mortgage origination requirements.
During this time, you can decide what to do with the property and how you want to satisfy the reverse mortgage loan, provided you are actively communicating with your lender and providing necessary documentation to receive 90-day extensions.
If no action is taken to pay off the loan at least 6 months after the homeowner’s death, the lender can start the foreclosure process.
The loan becomes due and payable if the homeowner moves to a nursing home or another long-term care facility. The heirs can pay off the loan, sell the property or allow the lender to foreclose on the property.
After the borrower’s death, heirs generally have 6 – 12 months to pay off a reverse mortgage loan. A lender may extend the timeline if they believe you’re making a “good faith effort” to sell or refinance the property.
Generally, reverse mortgages are not transferable. You cannot continue to receive payments from a reverse mortgage taken out in someone else’s name. The exception to the rule would be if someone, such as a surviving spouse, is listed as a co-borrower.
Know Your Options for Taking On a Reverse Mortgage
Inheriting a home with a reverse mortgage can be challenging, but there are options you can exercise to help ease any potential financial burden of the loan.
You can sell the property, refinance the mortgage, or hand the deed over to the lender to avoid foreclosure.Before you make any decisions, speak with a HUD-approved mortgage counselor. They can help you understand the process, your options and the implications of each option so you can make the best decision for you and your family.
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The Short Version
- A reverse mortgage allows homeowners age 62 and older to convert some of their home equity into cash
- Refinancing is a great option if you want to keep the home and are low on cash
- You aren’t automatically responsible for the reverse mortgage debt payoff just because you’re an heir, but if you decide to keep the house, you must repay it
Congressional Budget Office. “The Role of the Federal Housing Administration in the Reverse-Mortgage Market.” Retrieved October 2022 from https://www.cbo.gov/system/files/2019-05/55247-ReverseMortgages.pdf
National Center on Laws and Elder Rights. “Frequently Asked Questions: Reverse Mortgage Update—Options for Borrowers and Surviving Non-Borrowing Spouses Facing Foreclosure.” Retrieved October 2022 from https://ncler.acl.gov/getattachment/Legal-Training/HUD-New-Rule-FAQ-Sheet.pdf.aspx?lang=en-US
Consumer Financial Protection Bureau. “You have a reverse mortgage: Know your rights and responsibilities.” Retrieved October 2022 from https://files.consumerfinance.gov/f/documents/cfpb_reverse_mortgage_rights_responsibilities.pdf