A reverse mortgage is a home loan in reverse. Instead of getting a traditional mortgage to buy a home, older homeowners can use their equity to get cash from a lender, either as a lump sum or a monthly payment. The balance isn’t due until the homeowner dies, moves out of the home, or stops meeting other requirements.
But the rules for reverse mortgages can get tricky when the borrower dies and their home passes to heirs. Here’s what happens when you inherit a home with a reverse mortgage.
- A reverse mortgage comes due when the borrower dies or when they move out of or sell their home.
- If you inherit a home with a reverse mortgage, you can sell the home, pay off the loan, or give the lender a deed in lieu of foreclosure.
- Most reverse mortgages are federally backed HECMs, which come due 30 days after the borrower’s death.
What Heirs Need To Know About Reverse Mortgages
A reverse mortgage can be a good way for people age 62 and older to get cash out of their home without selling the property. However, reverse mortgages come with a strict set of rules and deadlines, which can be complicated for their heirs. If you’ll inherit a home with a reverse mortgage, expect that less equity will be left for you and other heirs.
Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are backed by the Federal Housing Administration (FHA). However, some companies offer proprietary reverse mortgages that aren’t federally insured and are typically targeted at higher-value homes. Some state and local governments, along with nonprofit organizations, offer single-purpose reverse mortgages, which can only be used for a designated purpose, such as home improvements.
The rules for heirs and reverse mortgages vary based on the type of loan. This article focuses on what heirs need to know about HECMs, since they’re the most common type of reverse mortgage.
If you’ll inherit a home with a different kind of reverse mortgage, review the agreement to make sure you understand the rules and requirements.
Under HECM rules, if the home you’ll eventually inherit has a co-borrower, they’ll be able to keep living in the home and receiving payments after the death of one borrower, as long as they comply with the terms of the loan. In some circumstances, a non-borrowing spouse may be permitted to remain in the home, depending on whether they can pay off the loan and when the loan originated, although they won’t receive subsequent payments.
When the final borrower dies, the lender will stop making reverse mortgage payments. They’ll also send an appraiser to determine the property’s value. Heirs generally have three options, and must choose one within 30 days.
Keep the Home
When you inherit a home with an HECM, you’ll have to pay off either the entire loan balance or 95% of the home’s appraised value—whichever is less. If you choose to keep the home, you’ll never owe more than the loan balance.
Sell the Home
Many heirs choose to sell when they inherit a home with a reverse mortgage. Under HECM rules, you’ll have to repay the lender using the proceeds of the sale. If there’s money left over—meaning you sell the home for more than the loan balance—you get to keep the difference. If the loan balance is more than the sale price, FHA insurance will cover the remainder.
Deed in Lieu of Foreclosure
Another option if you don’t want to keep the property is to surrender it to the lender by providing a deed in lieu of foreclosure.
Can an Heir Refinance a Reverse Mortgage?
After you inherit a property, you can refinance a reverse mortgage. However, you’ll need to do so by obtaining a traditional mortgage, which will require you to qualify.
If you plan to pursue financing to purchase the home and pay off the reverse mortgage, you can request an extension from the lender. You may still receive pre-foreclosure notices from the lender during the extension period. For help requesting an extension, contact a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD).
Common Reverse Mortgage Problems for Heirs
Inheriting a home with a reverse mortgage can come with some red tape and surprises. Here are some common reverse mortgage problems for heirs.
The most obvious drawback when you’re heir to a home with a reverse mortgage is that it reduces the size of the borrower’s estate. This isn’t necessarily a bad thing, since a reverse mortgage can provide a loved one with much-needed income during retirement. However, if your parent or relative didn’t tell you they obtained a reverse mortgage, it can be an unwelcome surprise to learn that you’ll receive less money than you may have anticipated.
One common issue arises when a spouse who didn’t sign off on the reverse mortgage wants to stay in the home after the borrower’s death without repaying the loan. The surviving spouse may be able to stay if they qualify as an eligible non-borrowing spouse based on the lender’s rules. However, meeting these requirements can be difficult.
For reverse mortgages issued before Aug. 14, 2014, a surviving non-borrowing spouse can remain in the home without repaying the loan only if the lender offers the Mortgage Optional Election (MOE) assignment. If it doesn’t, the lender must either assign the loan to HUD or initiate foreclosure within 180 days of the original borrower’s death.
If there are multiple heirs, they’ll have to decide as a group whether to buy, sell, or surrender the home. Problems could develop if the heirs disagree on what to do with the home.
When you inherit a home with a reverse mortgage, there are strict deadlines. After being notified of the borrower’s death, the lender will mail the borrower’s estate a due and payable notice that includes the loan balance and options for repayment. If you’re an heir, you have 30 days to respond. You may be eligible for an extension if you show that you’re actively trying to sell the home or obtain financing to purchase it. If you miss these deadlines, the lender could start foreclosure proceedings.
It’s essential to communicate with your loved ones about a reverse mortgage, particularly if you want to keep the home you'll eventually inherit. Being open about the loan will help you organize your finances and understand your obligations.
Frequently Asked Questions (FAQs)
How long do heirs have to pay off a reverse mortgage?
An HECM reverse mortgage becomes due when the last borrower dies. The heirs will receive a due and payable notice, which gives them 30 days to buy, sell, or surrender the home. They may be able to extend the timeline up to a year if they’re selling the home or obtaining financing.
What happens if you have a reverse mortgage but you don’t have any heirs?
Your home becomes part of your estate after you die. If you don’t have any heirs to pay off the reverse mortgage loan, eventually the lender will foreclose on the home to recoup its money.
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