Reverse mortgages may help seniors whose net worth is largely dependent on the value of their property by giving them access to much-needed cash. For homeowners who are 62 years of age or older and have a sizable amount of home equity, a reverse mortgage is a loan.
Using the value of their property as collateral, seniors may get a reverse mortgage and receive their money as a lump amount, a set monthly payment, or a line of credit. When the borrower passes away, vacates the property permanently, or sells it, the whole loan sum becomes due and payable.
The reverse mortgage may pass to the borrower’s heirs in the event of death. Who will inherit the debt is one of several considerations that will determine what happens next. The debt must typically be repaid in full unless it is transferred to a spouse. However, inheriting a reverse mortgage may be a complicated process, and there have been complaints of issues brought on by uncooperative lenders, murky paperwork, and reverse mortgages that shouldn’t have been approved in the first place.
We’ll go through the most typical issues heirs may run into while inheriting a reverse mortgage in this post.
- Depending on whether you are the spouse and/or co-borrower of the mortgage, when it was originally issued, and other factors, the procedure for inheriting a property with a reverse mortgage attached varies.
- Despite recent changes, there are still certain scenarios in which a widow or widower who has lost their spouse might lose their house.
- You have one year to pay off the reverse mortgage in full if you receive one from your parents or grandparents (at most).You may either use your own money to pay the lender, refinance the house, or sell it to do so.
- If you are unable to sell it for more than the outstanding debt, you won’t be held responsible for the loss, but you also won’t receive money from the sale.
- Communication is the key to avoiding these issues. Make sure that you tell your spouse and your heirs about your reverse mortgage before they inherit it.
Inheriting a Reverse Mortgage as a Spouse or Co-Borrower
A reverse mortgage is often inherited from a spouse. Reverse mortgage loans often need to be returned after the borrower passes away, and this is typically done by selling (or refinancing) the home.
However, if you and your spouse resided in a house that has a reverse mortgage linked to it, unique restrictions govern what happens to such reverse mortgages. The laws in this field are complicated, however they essentially hinge on the following:
- Whether you are a co-borrower on the reverse mortgage loan. If this is the case, you will be able to remain in the home and receive loan payments as long as you meet the obligations of the reverse mortgage loan.
- When you took out the reverse mortgage. If you are not a co-borrower on the reverse mortgage, you still may be able to stay in your home without paying off the loan. This, in turn, depends on when the loan was originated (meaning when it was taken out) (meaning when it was taken out).To stay in the home, you will have to qualify as an Eligible Non-Borrowing Spouse under U.S. Department of Housing and Urban Development (HUD) rules. Qualifying to be an Eligible Non-Borrowing Spouse can be difficult, but the process is easier if your spouse took out the reverse mortgage on or after Aug. 4, 2014.
- Whether you were wed at the time the loan contracts were executed and were wed until your death. If this is the case and your spouse obtained the reverse mortgage after August 4, 2014, you will be permitted to remain in your home without having to repay the reverse mortgage debt because you will be considered an Eligible Non-Borrowing Spouse.
These intricate regulations may lead to issues. Although both partners must approve reverse mortgage loans, neither must be listed as a co-borrower. If a residence is shared by two couples but only one is listed as the borrower on the reverse mortgage, the other spouse might lose the house if the borrowing spouse passes away first (or has to move into an assisted living facility or nursing home for a year or longer).If just one spouse owns the home, either as a result of an inheritance or because the ownership predates the marriage, only one spouse may be a borrower.
To ensure that the second spouse may continue to live in the home till death after the first spouse passes away, it is ideal for both spouses to have title to the property and to be the reverse mortgage’s borrowers. To ensure that your loan records are correct and that you and your co-borrower are both on the loan, it is a good idea to contact your reverse mortgage servicer. Find out who is mentioned on your loan by calling your servicer, and get a hard copy for your records.
Reverse mortgages contain certain real concerns, in addition to the possibility for frauds that prey on the elderly. Despite recent changes, there are still certain scenarios in which a widow or widower who has lost their spouse might lose their house.
Reverse Mortgage Problems for Heirs
You must repay the reverse mortgage to the lender if you inherit a home that has a reverse mortgage on it but you are neither a co-borrower nor the spouse of the person who died away. There are three methods to achieve this:
- With estate or other cash, pay off the whole mortgage debt.
- By securing a “forward” mortgage on the property, you may completely pay off the reverse mortgage’s remaining sum.
- With the money from selling the property, pay off the reverse mortgage.
Whether you wish to retain ownership of the property will determine which choice is best for you. If so, you should choose either option 1 or option 2. Depending on which is less, you will have to pay back either the whole loan sum or 95% of the home’s assessed worth.
Option 3 is available if you are unable to pay the remaining debt on the mortgage via other means or do not choose to maintain the inherited home. The most popular choice is this one. The Consumer Financial Protection Bureau states that the majority of heirs will sell the home in order to get the required funds.
Families that are inheriting a home may have difficulties and anguish as a result of this procedure. Reverse mortgages aren’t advised for seniors who wish to leave property to their heirs because of this, among other reasons. These heirs may not be eligible for a standard fixed-rate forward mortgage, but it may provide them with a financial option for obtaining ownership. In such situation, a beloved family home can be sold to an outsider to pay off the reverse mortgage debt right away.
If you decide to sell your house to pay off this debt and the price you can receive for it is less than the loan balance, a second issue can occur. This could occur if the property has suffered physical harm or deterioration, local house prices have dropped, or if the borrower has outlived the life expectancy table that the lender used to calculate the initial loan amount.
In this situation, you are safeguarded. The remaining money goes to one’s heirs if the house sells for more than the sum still owed on the loan. The Federal Housing Administration (FHA) insurance pays the lender’s loss if a house sells for less than it is appraised for, leaving no money for the heirs. In other words, the amount of the reverse mortgage payments cannot be more than the sales price of the property. After the sale, the homeowners’ estate is not held liable for any outstanding mortgage debt.
Therefore, even if you won’t inherit a home, you won’t have any debt to pay back either.
The failure to inform heirs that their parents’ or grandparents’ reverse mortgage exists is a major source of issues. By discussing jointly what they will do after your death, you may prepare any non-borrowing family members residing in the house and let them know what to anticipate.
Inheriting a Reverse Mortgage: A Timeline
The strict timeline required to do so when inheriting a reverse mortgage is another significant source of issues. Whatever your connection to the deceased individual was, you must act promptly to ensure that you retain control over what happens to their property.
After the first borrower dies, a reverse mortgage typically follows the following timeline:
Most lenders have access to death certificate tracking databases. The lender notifies the estate of a Due and Payable Notification within 30 days after receiving a notice of the borrower’s death. The note includes instructions on how the heirs should proceed:
- Reverse mortgage’s outstanding loan sum must be satisfied.
- Sell the house for a minimum of 95% of its assessed value.
- Give the lender a deed in lieu of foreclosure, i.e., allow the lender to sell the home.
The lender will also give along a list of prerequisites for a deferral period together with this information on the reverse loan.
The residence must be appraised by the heirs no later than 30 days after the delivery of the Due and Payable Notice. If the conditions listed by HUD are satisfied, the surviving, non-borrowing spouse may petition for a deferral.
The decision to sell the home in order to pay off the reverse mortgage loan must be made by the heirs within this time period. Keep in mind that interest will still be charged on the loan throughout this period. If no steps are made to repay the reverse mortgage, the lender may begin the foreclosure procedure to settle the obligation within six months following the borrower’s death.
Subject to HUD approval, heirs may be qualified for two three-month extensions to settle the reverse mortgage debt. This provides the borrower’s heirs up to a full year after his or her death to pay back the loan sum or sell the house.
What happens if I inherit a house with a reverse mortgage?
In addition to a few other considerations, it relies on your connection to the dead borrower. You have one year to pay off the reverse mortgage in full if you receive one from your parents or grandparents (at most).You may either use your own money to pay the lender, refinance the house, or sell it to do so.
Can a family member take over a reverse mortgage?
No. A family member cannot be added to an existing reverse mortgage.
What happens if the owner goes into a nursing home?
There are residence restrictions for reverse mortgages. The reverse mortgage loan will become due, the house may be sold, and any money made from the sale of the house might exclude you from receiving government assistance if you stay in a nursing home for a lengthy period of time.
The Bottom Line
There are many issues that inheriting a reverse mortgage may bring up for heirs. Depending on whether you are the spouse and/or co-borrower of the mortgage, when it was originally issued, and other factors, the procedure for inheriting a property with a reverse mortgage attached varies. Despite recent changes, there are still certain scenarios in which a widow or widower who has lost their spouse might lose their house.
You have one year to pay off the reverse mortgage in full if you receive one from your parents or grandparents (at most).You may either use your own money to pay the lender, refinance the house, or sell it to do so. You won’t be held accountable for the loss, but you also won’t get any money from the sale if you are unable to sell it for more than the balance owed.
The solution to preventing these problems is communication. The failure to inform heirs that their parents’ or grandparents’ reverse mortgage exists is a major source of issues. By discussing jointly what they will do after your death, you may prepare any non-borrowing family members by letting them know what to anticipate.
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