902 what happens if you inherit a house with a reverse mortgage

What Happens if You Inherit a House with a Reverse Mortgage?

Kevin O’Leary June 4, 2024 0

Inheriting a house can be a complex and emotional process, especially when the property has a reverse mortgage attached to it. Understanding the implications of a reverse mortgage and the options available to heirs is crucial for navigating this challenging situation. In this article, we’ll explore what happens when you inherit a house with a reverse mortgage, the choices heirs have, and the steps involved in resolving the loan.

Understanding Reverse Mortgages and Inheritance

What is a Reverse Mortgage?

A reverse mortgage is a financial product that allows older homeowners to convert part of the equity in their homes into cash. Unlike a traditional mortgage, where the borrower makes monthly payments to the lender, a reverse mortgage allows the homeowner to receive payments from the lender, either as a lump sum, monthly installments, or a line of credit. The loan balance becomes due when the borrower passes away, moves out permanently, or sells the home.

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). This insurance protects the lender in case the loan balance exceeds the home’s value at the time of repayment.

What Happens to a Reverse Mortgage When the Homeowner Dies?

When a homeowner with a reverse mortgage passes away, the entire loan balance becomes due. This means that any heirs inheriting the property are responsible for repaying the debt. If the deceased homeowner was married, the surviving spouse may be able to continue living in the home without repaying the loan, provided they were a co-borrower or met certain eligibility criteria as a non-borrowing spouse.

If the heirs are unable or unwilling to repay the reverse mortgage, the lender has the right to initiate foreclosure proceedings to take possession of the property and sell it to recover the outstanding loan balance. However, the U.S. Department of Housing and Urban Development (HUD), which oversees HECM loans, has guidelines in place that require lenders to work with heirs to resolve the debt within a reasonable timeframe.

Options for Heirs Inheriting a Home with a Reverse Mortgage

Repaying the Reverse Mortgage Loan

One option for heirs is to assume the reverse mortgage and pay off the outstanding balance using their own funds or by obtaining a traditional “forward” mortgage. This allows them to keep the property and, in some cases, benefit from any remaining equity. However, this may not be feasible if the loan balance exceeds the home’s value or if the heirs lack the financial resources to qualify for a new mortgage.

In some cases, heirs may be able to work with the lender to establish a repayment plan or modify the loan terms to make it more manageable. It’s essential to communicate openly with the lender and seek guidance from a financial professional or attorney specializing in reverse mortgages and estate planning.

Selling the Inherited Property

Another option for heirs is to sell the inherited house and use the proceeds to pay off the reverse mortgage. If the sale price exceeds the loan balance, the heirs can keep the remaining funds. However, if the sale price is less than the loan balance, the heirs are not responsible for the difference due to the non-recourse nature of HECM loans.

Selling an inherited property with a reverse mortgage can be challenging, as the loan balance creates a “clouded title,” making it harder to transfer ownership. Buyers and title companies may require assurances that the debt will be settled at closing. Working with a real estate agent experienced in handling properties with reverse mortgages can help navigate this process.

Walking Away from the Property

If the inherited property has little or no equity, or if the heirs are unable or unwilling to assume the financial responsibility, they may choose to walk away from the property. In this case, they can surrender the property to the lender through a “deed in lieu of foreclosure” or allow the lender to proceed with foreclosure.

While walking away from an inherited property may seem like an easy solution, it’s essential to consider the potential consequences, such as damage to credit scores and the emotional impact of losing a family home. Consulting with a foreclosure attorney or a HUD-approved housing counselor can help heirs understand their rights and make informed decisions.

Timeline and Process for Resolving an Inherited Reverse Mortgage

Receiving the Due and Payable Notice

After the borrower’s death, the loan servicer will send a “due and payable” notice to the heirs, informing them that the reverse mortgage must be repaid. This notice is typically sent within 30 days of the lender learning of the borrower’s death. The heirs then have 30 days to respond and indicate their intentions regarding the property.

It’s crucial for heirs to open and respond to any correspondence from the loan servicer promptly to avoid missed deadlines and potential foreclosure proceedings.

Communicating the Heir’s Intentions

Within 60 days of receiving the due and payable notice, the heirs must inform the lender of their intentions to either keep the property or sell it. If the heirs decide to keep the property, they must provide evidence of their ability to pay off the loan balance. If they choose to sell, they must demonstrate that they are actively marketing the property.

Clear communication with the lender is essential to ensure that all parties understand the timeline and requirements for resolving the reverse mortgage.

Completing the Chosen Course of Action

Once the heirs have communicated their intentions, they typically have 6 months to complete the chosen course of action, whether it’s paying off the reverse mortgage or selling the property. In some cases, heirs may be able to request an extension if they can demonstrate that they are making progress toward resolving the debt.

If the heirs are unable to pay off the loan or sell the property within the allotted time frame, the lender may proceed with foreclosure to take possession of the home and sell it to recover the outstanding balance.

Estate Planning Considerations for Reverse Mortgages

Setting Aside Funds to Pay Off the Mortgage

Property owners with reverse mortgages can take proactive steps to minimize the burden on their heirs by setting aside funds within their estate to pay off the loan balance. This can be accomplished through a variety of means, such as establishing a life insurance policy with a death benefit sufficient to cover the reverse mortgage or earmarking specific assets for liquidation to satisfy the debt.

By planning ahead and allocating resources to address the reverse mortgage, homeowners can help their heirs avoid the stress and financial strain of inheriting a property with a significant loan balance.

Placing the Property in a Trust

Another estate planning strategy for dealing with reverse mortgages is to place the property in a living revocable trust. By transferring ownership to the trust, the homeowner can specify how the property should be managed and distributed upon their death, potentially streamlining the inheritance process and avoiding probate.

However, it’s essential to note that placing a property with a reverse mortgage in a trust does not eliminate the loan balance or the heirs’ responsibility to repay the debt. The trust must still address the reverse mortgage according to the lender’s requirements and timelines.

Seeking Professional Guidance

Estate Administration Attorneys

Navigating the complexities of an inherited property with a reverse mortgage can be overwhelming for heirs. Seeking the guidance of an experienced estate attorney who understands the intricacies of these loans and the probate process can be invaluable in making informed decisions and protecting the heirs’ interests.

An estate administration attorney can help heirs understand their rights and obligations, communicate effectively with lenders and loan servicers, and develop a strategy for resolving the reverse mortgage while minimizing legal and financial risks.

Financial Planners and Consumer Protection Lawyers

Homeowners considering a reverse mortgage can benefit from consulting with a financial planner or a consumer protection lawyer to fully understand the implications of these loans and explore alternative options. These professionals can provide valuable insights into the long-term financial impact of reverse mortgages, as well as strategies for preserving wealth and protecting assets for future generations.

Organizations such as the American Association of Retired Persons (AARP) offer resources and information to help homeowners make informed decisions about reverse mortgages and plan for the future.

Foreclosure Attorneys for Inherited Reverse Mortgages

If an inherited property with a reverse mortgage is facing foreclosure, heirs may need to seek the assistance of a foreclosure lawyer who specializes in these cases. A knowledgeable attorney can help heirs understand their rights, negotiate with lenders, and explore options for preventing or delaying foreclosure proceedings.

In some cases, heirs may have grounds to challenge the foreclosure if the lender or loan servicer has not followed proper procedures or if there are discrepancies in the loan documents. An experienced foreclosure attorney can review the case and advise heirs on the best course of action to protect their interests and potentially save the property.

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