What Happens When You Inherit a Home with a Reverse Mortgage? Key Considerations for Heirs

Introduction

Inheriting a home with a reverse mortgage can be complicated and may come with financial responsibilities. Reverse mortgages, while beneficial for senior homeowners, can pose challenges for heirs when the loan becomes due after the borrower passes away. This article provides a comprehensive guide on what heirs should expect, their options, and how to handle an inherited home with a reverse mortgage.

Understanding Reverse Mortgages and Inheritance

A reverse mortgage allows senior homeowners to access their home equity, typically receiving payments in lump sums or monthly installments without making mortgage payments. The loan becomes due when the homeowner passes away, moves out of the home permanently, or sells the property. When the borrower dies, the reverse mortgage must be paid off, which becomes the responsibility of the heirs if the homeowner’s estate has inherited the property.

What Happens When the Borrower Passes Away?

When a homeowner with a reverse mortgage dies, several key events occur:

1. Loan Balance Becomes Due: The full amount borrowed under the reverse mortgage, plus any interest and fees, must be repaid. The total owed can never exceed the value of the home, as reverse mortgages are non-recourse loans.
2. Heirs Are Not Personally Liable: The heirs are not responsible for paying the reverse mortgage from their personal funds. The loan is repaid using the proceeds from the sale of the home or by refinancing.
3. Time Frame for Repayment: Heirs typically have a six-month period to repay the loan or sell the home. In some cases, lenders may offer two three-month extensions, giving heirs up to a year to resolve the debt.

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Options for Heirs: What Can You Do?

When inheriting a home with a reverse mortgage, heirs have several options:

1. Sell the Home: The most common option is to sell the home. The proceeds from the sale are used to pay off the reverse mortgage. If the sale price exceeds the loan balance, the remaining funds go to the heirs. If the sale price is less than the loan amount, the lender absorbs the difference, and heirs are not responsible for covering the shortfall.
2. Refinance the Mortgage: If heirs want to keep the home, they can choose to refinance the reverse mortgage into a traditional mortgage or other loan. This requires that the heirs qualify for a new mortgage and be able to make monthly payments.
3. Pay Off the Loan: Another option is to pay off the reverse mortgage in full using other funds, such as savings, life insurance proceeds, or other assets in the estate. This allows heirs to retain the home without taking on a new mortgage.
4. Deed in Lieu of Foreclosure: If heirs cannot sell the home or pay off the reverse mortgage, they can sign a deed in lieu of foreclosure. This process allows the heirs to transfer ownership of the home to the lender, which satisfies the debt and avoids foreclosure proceedings.

What If the Home Is Underwater?

In some cases, the amount owed on the reverse mortgage may exceed the home’s value, a situation commonly referred to as being “underwater.” Heirs are not required to repay the difference between the loan balance and the home’s market value, as reverse mortgages are non-recourse loans. Heirs can either:

• Sell the Home for 95% of Its Appraised Value: If the home’s value is less than the loan balance, heirs can sell it for 95% of its current appraised value. The lender will accept this amount as full payment, and the loan is considered satisfied.
• Walk Away: If the home’s value is significantly lower than the loan balance, heirs may choose to let the lender foreclose and take possession of the home. Since heirs are not personally liable for the reverse mortgage, they do not suffer financial penalties for walking away from an underwater home.

Important Considerations for Heirs

1. Time Sensitivity: Heirs must act quickly to either sell the home, refinance, or pay off the loan. Failure to act within the required time frame can lead to foreclosure, which would transfer ownership of the home to the lender.
2. Market Conditions: Before deciding whether to sell or keep the home, heirs should evaluate local real estate market conditions. If the housing market is strong and the home is likely to sell for more than the reverse mortgage balance, selling may be the best option. In weaker markets, heirs might consider other alternatives like refinancing or handing over the property.
3. Emotional Attachment: Inheriting a family home can be emotionally charged, and some heirs may feel a strong desire to keep the property. It’s essential to balance emotional considerations with financial realities when making decisions about how to handle the reverse mortgage.
4. Legal and Tax Implications: Inheriting a home with a reverse mortgage can involve legal and tax complexities. Heirs should consult with a tax advisor or estate attorney to understand any potential estate taxes or other financial implications associated with the inheritance.

Steps to Take When Inheriting a Home with a Reverse Mortgage

1. Notify the Lender: The lender must be informed of the homeowner’s death. This typically triggers the repayment process, and the lender will provide heirs with details on the loan balance and available options.
2. Determine the Home’s Value: Heirs should have the home appraised to understand its current market value. This information is critical in deciding whether to sell, refinance, or pay off the loan.
3. Review the Loan Balance: The lender will provide the outstanding loan balance, including interest and fees. Heirs should compare this amount to the appraised value to assess whether the home is underwater.
4. Explore Financing Options: If heirs wish to keep the home, they should explore refinancing options and determine whether they qualify for a new mortgage.
5. Consult Professionals: Estate attorneys, financial advisors, and real estate agents can provide valuable guidance on the best course of action, ensuring that heirs make informed decisions.

Conclusion

Inheriting a home with a reverse mortgage can be a complex process, but understanding your options is crucial to making the right decision. Whether you choose to sell the home, refinance, or transfer ownership to the lender, knowing the financial and legal implications will help you navigate this situation. It’s important to act within the time frames provided by the lender and seek professional advice when necessary to protect your inheritance and avoid unnecessary complications.