What Heirs Need to Know About Reverse Mortgages

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What Heirs Need to Know About Reverse Mortgages

With a reverse mortgage, an elderly homeowner may access the equity that has grown in their property without having to sell it. But eventually, the loan must be repaid, and the borrower’s successors often take on this duty.

Here is what heirs need to know about reverse mortgages.

Key Takeaways

  • Reverse mortgages normally need to be repaid when the borrower passes away, vacates the property for more than a year, or sells it.
  • Co-borrowers are still able to make loan payments while living in the property.
  • Depending on whether they are co-borrowers, eligible non-borrowing spouses, or ineligible non-borrowing spouses, different restrictions apply to spouses.
  • The house must typically be sold or purchased by other heirs.

Reverse Mortgage Basics

A home equity conversion mortgage is the most typical sort of reverse mortgage (HECM).These loans are made by lenders who have been authorized by the Federal Housing Administration (FHA) and are guaranteed by the FHA. Borrowers must be 62 years or older to use them.

The loan must be repaid within a certain time period in the event of the borrower’s (or last co- borrower’s) death, a move out for 12 months or more (such as into a nursing home), or the sale of the property. Whether the home’s successor is a spouse or someone else determines the exact regulations and timeline.

If You Are the Borrower’s Spouse

Here is a quick overview of the three primary categories that spouses might be placed. Please be aware that the guidelines below only apply to HECMs that were created on or after August 4, 2014. For earlier HECMs, the regulations are different in certain ways. On the Consumer Financial Protection Bureau website, you may see both sets of regulations.

1. Co-Borrowing Spouses

On the loan documentation, a co-borrowing spouse must be identified as such. They had to have been 62 years of age or older when the loan was made in order to have been eligible to be a co-borrower in the first place. Co-borrowers must be older spouses. After their spouse passes away, co-borrowing spouses are still eligible to receive payments from the lender and remain in the property. When a co-borrowing spouse passes away or separates, the house passes to their heirs, who are then responsible for repaying the debt in accordance with the terms listed below.

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2. Eligible Non-Borrowing Spouses

In the loan paperwork, spouses who weren’t 62 years old when their spouse applied for a reverse mortgage may be included as eligible non-borrowing spouses. They will be allowed to stay in the house after their spouse passes away provided they satisfy all the requirements. These requirements include continuing to live in the house as their primary residence and having done so at the time the loan closed. They won’t, however, continue to receive payments from the loan as a co-borrower would. When the eligible non-borrowing spouse vacates the property, the debt will become payable.

Same-Sex Couple Exemption

You must typically be lawfully wed under the rules of the state where you live or where your wedding took place in order to be considered an eligible non-borrowing spouse. However, if they later were married, same-sex couples who couldn’t get married at the time the HECM was granted may be considered acceptable non-borrowing spouses.

3. Ineligible Non-Borrowing Spouses

A non-borrowing spouse who is neither a co-borrower nor satisfies the criteria for eligible non-borrowing spouses is an ineligible non-borrowing spouse. In this scenario, a spouse can only stay in the house by paying off the reverse mortgage.

If You’re Not the Borrower’s Spouse

You have the same rights as a co-borrowing spouse even if you are not the borrower’s spouse but are mentioned in the mortgage paperwork as a co-borrower. If a residence with a reverse mortgage is inherited by someone who is not their spouse, they have three main options:

  • If any equity remains after you sell the house and pay off the mortgage, you get to keep it.
  • Keep the house and pay off the mortgage with your own funds; this could require getting a new, conventional loan.
  • A deed in lieu of foreclosure is when you give the house over to the lender to pay off the debt.
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According to the regulations, you have 30 days to repay the loan after obtaining a Due and Payable Notice from the lender. But you may ask for a one-year extension if you need more time to sell the house or get finance to purchase it outright.

The HECM regulations prevent inheritors from owing more on the mortgage than the property is worth. Your obligation to pay is capped at the lesser of the loan sum or 95% of the home’s assessed value. The lender will get the difference via FHA insurance.

Where to Go for Help

The regulations governing reverse mortgages may be challenging, particularly for heirs who are not married and for spouses who are both eligible and ineligible to take out a loan. Your alternatives should be explained by the reverse mortgage lender or loan servicer, or you may choose to engage a lawyer.

For free or inexpensive guidance, speak with a housing counselor who has been authorized by the U.S. Department of Housing and Urban Development (HUD). The parent agency of the FHA, HUD, includes a search function on its website for locating a counseling agency that has been authorized. It may be reached at (800) 569-4287.

What are the different types of reverse mortgages?

There are three types of reverse mortgages:

What if you live in a home with a reverse mortgage but are not a spouse or an heir?

You must depart a house with a reverse mortgage if you are not a co-borrower, an eligible non-borrowing spouse, or an heir to the property when the borrower passes away or vacates the property for more than 12 months. Additionally, heirs must vacate the property unless they pay off the debt and buy the house.

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Can a borrower pay off their own reverse mortgage?

Yes, the original borrower has the option to pay off the reverse mortgage by selling the house, for example. In rare cases, the borrower could be obliged to repay the loan, such as when the house has suffered major damage or when they are unable to make their homeowner’s insurance or property tax payments.

The Bottom Line

After the last borrower passes away or vacates, reverse mortgages must be paid off. Depending on whether they are eligible or ineligible non-borrowing spouses or other heirs, heirs then have a number of alternatives. Consider your alternatives (such as selling the house or purchasing it yourself) in advance if you anticipate inheriting a home with a reverse mortgage. You’ll do your heirs a favor if you talk to them about your alternatives if you have a reverse mortgage.

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