If you inherited a house with a reverse mortgage or if you expect to inherit a house that has a reverse mortgage, you may be wondering what this means for you and your financial future. Will you be able to keep the house? Will you be responsible for paying off the reverse mortgage loan?
In this article, we will explore the implications of inheriting a house with a reverse mortgage and what steps you can take to manage the situation.
Understanding Reverse Mortgages
Before we dive into the specifics of inheriting a house with a reverse mortgage, it’s important to understand what a reverse mortgage is and how it works.
A reverse mortgage, also known as a home equity conversion mortgage (HECM), is a type of loan that allows homeowners aged 62 or older to convert a portion of their home’s equity into cash while also eliminating monthly mortgage payments.
If the borrower still has a traditional mortgage on the home when they take out the mortgage, the reverse mortgage loan will first be used to pay off that existing mortgage. The remaining equity will go to the borrower as a lump sum, monthly payments, or a line of credit.
Homeowners are still responsible for paying the property taxes, insurance, any other required fees, and maintaining the home.
The loan is repaid when the borrower moves out of the home, sells the home, no longer lives in the home full-time, or passes away.
A reverse mortgage loan is backed by the federal government through the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA).
Inheriting a House with a Reverse Mortgage
When an heir inherits a house with a reverse mortgage, they inherit not just the property but also the responsibility to settle this loan. Likewise, if a house still has a traditional forward mortgage on it, the heirs are responsible for continuing to make the mortgage payments.
Upon the death of the homeowner, the reverse mortgage becomes due and payable.
Immediate Steps to Take
When a reverse mortgage borrower passes away, heirs must promptly notify the lender of the borrower’s death.
After this is done, they can expect to receive a due and payable notice from the lender.
Options for Inheriting a House with a Reverse Mortgage When the Last Borrower Passes Away
When someone inherits a house, whether it has a reverse mortgage, traditional mortgage, or no mortgage, one of the first steps they need to make is to change the name on the deed of the house so that the property is in their own name. This is what will make it legally yours and give you the legal right to make a decision about the property, according to Trust & Will.
It is recommended to enlist the help of an estate attorney to help you with this process and to help you make an informed decision about the next steps.
The next step you will need to take is to decide how you want to go about settling the existing loan. These are your options:
- Keep the home. If you want to keep the home, you can do so by paying off the reverse mortgage balance with cash or by taking out a traditional mortgage on the home. If your loved one has other assets that were left to you, the money from those assets can be used to pay off the loan.
- Sell the home. Another option for paying off the reverse mortgage loan is to simply sell the home. If you sell the home for more than the loan amount, you will be able to keep the surplus.
- Sign over to the lender. If you don’t want to worry about paying off the full loan balance, you also have the option to sign a deed in lieu of foreclosure. In this case, you will be signing the home over to the lender to handle selling the home.
- Do nothing. The heir can also choose to do nothing. The lender will begin the foreclosure process and then sell the house.
Whatever your decision, it’s important for heirs to act promptly, as lenders typically allow a limited period, often about six months, to settle the reverse mortgage loan balance.
Options for Inheriting a House with a Reverse Mortgage if You are the Spouse
If you are the surviving spouse of the original borrower of a reverse mortgage, you will fall into one of the following categories — the co-borrower, the eligible non-borrowing spouse, or the ineligible non-borrowing spouse.
Here are your options depending on which category you fall under:
- Co-borrower. If you are a named co-borrower on the home, you will continue to live in the home and benefit from the reverse mortgage as you did before your spouse passed away.
- Eligible non-borrowing spouse. An eligible non-borrowing spouse may be allowed to remain in the home after the spouse passes away as long as the home is their primary residence and he or she continues to meet the loan terms, such as paying property taxes, insurance, and maintaining the home.
- Ineligible non-borrowing spouse. An ineligible non-borrowing spouse will likely have to repay the loan to remain the home.
An eligible non-borrowing spouse may not be a named co-borrower if they didn’t meet the age requirements for the loan or if he or she was significantly younger than the named borrower.
When applying for a reverse mortgage, the loan amount is partly determined by the age of the youngest borrower, so if the borrower is significantly older than their spouse, he or she may be able to obtain more money from the loan than if they don’t include their spouse as a co-borrower.
An eligible non-borrowing spouse must be legally married to the borrower when the loan closes and at the time of the borrower’s death and occupy the home as their primary residence. The eligible non-borrowing spouse must be disclosed to the lender when obtaining a reverse mortgage.
An ineligible non-borrowing spouse does not meet these requirements.
Estate Planning and Reverse Mortgages: How to Prepare for Inheriting a House with a Reverse Mortgage
If homeowners plan to have a reverse mortgage on the home that they are leaving to their heirs, attorney David Brillant recommends that they collaborate with their families. Brillant is a Certified Specialist in Estate Planning, Trust and Probate Law, and a Tax Attorney.
“I’ve witnessed the benefits of proactive communication in estate planning involving reverse mortgages,” Brillant told Mutual of Omaha Mortgage.
“In one case, by involving the heirs in the planning process early on, we were able to address their concerns and prepare a comprehensive plan that included the reverse mortgage as part of the estate, along with contingency strategies for managing the loan’s repayment,” he explained.
“This not only helped in preserving family harmony but also ensured that the estate was managed according to the client’s wishes,” the certified estate law specialist said.
Mike Kojonen, the founder and owner of Principal Preservation Services, an estate planning and retirement investment firm, has also worked with clients who had a reverse mortgage and wanted to leave the home to their children.
“We worked closely to ensure that their other assets were structured to provide options for their children to either pay off the reverse mortgage or to inherit other assets of equivalent value if they decided not to keep the home,” Kojonen explained to Mutual of Omaha Mortgage.
“This planning involved detailed discussions about the home’s value, the potential growth of their other assets, and the expectations of their heirs,” he added.
Inheriting a House with a Reverse Mortgage FAQs
Can you inherit a house that has a reverse mortgage?
Yes, you can inherit a house with a reverse mortgage, but you will need to decide how you are going to settle the reverse mortgage loan depending on whether you want to keep or sell the home.
Are heirs responsible for the reverse mortgage debt?
Heirs or family members are not inherently responsible for the reverse mortgage debt. They are only responsible for the outstanding debt if they decide they want to keep the property or handle the sale of the property.
If they don’t want this responsibility, they can sign the deed of the home over to the reverse mortgage lender to let them handle the sale of the home to settle the debt.
How long do heirs have to pay off a reverse mortgage?
Heirs are typically given six months to settle a loan. If they are selling the home, they may be able to receive two 90-day extensions, giving them 12 months to settle the loan.
What if the reverse mortgage loan is more than the market value of the home?
A reverse mortgage is categorized as a non-recourse loan. This means that neither the borrower nor the heirs “will never owe more than the loan balance or the value of the property, whichever is less,” according to HUD.
This also means that lenders can’t use other assets that belong to the borrower or to the borrower’s estate to settle the loan.
If the heirs decide to sell the home, and they sell it for more than the loan balance or the appraised home value, they will be able to keep any money beyond what is needed to pay off the loan. This also means that if they decide to keep the home, the money needed to pay off the loan cannot exceed this amount.
Bottom Line
Inheriting a house with a reverse mortgage requires careful consideration of the legal and financial ramifications. Heirs should consult with legal and financial advisors to navigate the complexities and make informed decisions that align with their circumstances and the wishes of the deceased.
Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
