What happens if you inherit a house that has a reverse mortgage?
Although grateful for this generous gift, you soon learn the property has an outstanding reverse mortgage loan.
What exactly does this entail for you as the heir? What are your responsibilities and options?
Inheriting a house with a reverse mortgage in place can certainly complicate matters. But with proper planning, you can resolve the situation smoothly.
This guide covers key questions heirs should consider:
- How does a reverse mortgage affect inheritance?
- Do heirs have to pay off the full loan balance?
- What is the timeline for heirs to act after the borrower's death?
- What are the alternatives to keeping the home as an inherited property?
- How can heirs avoid reverse mortgage problems down the l
Read on for the answers to these questions and more to help you manage an inherited home with an active reverse mortgage.
How does a reverse mortgage affect passing down a house?
First, a quick refresher on how reverse mortgages work.
These special loans allow homeowners 62 and older to tap into their home equity without making monthly payments. The borrowed money is not repaid until the primary borrower dies, sells the home, or moves out permanently.
At that point, the reverse mortgage comes due to be settled. This often falls onto the shoulders of heirs, who might be surprised to find out the deceased borrower had this complex loan.
Many falsely assume the mortgage is voided, and they can simply inherit the home mortgage-free. But, an outstanding reverse mortgage must be satisfied before heirs can take ownership.
The good news is that heirs have options and are not necessarily forced to fully repay the loan to keep the property.
Do heirs always have to pay off the full reverse mortgage balance?
The short answer is no.
Although heirs can pay the lender the full remaining mortgage principal, accumulated interest, and fees to satisfy the lien and gain free and clear ownership, there are other ways to satisfy the reverse mortgage.
What are the other options heirs have?
Instead of paying off the mortgage, heirs can sell the inherited property and use a portion of the proceeds to repay the reverse mortgage. Any remaining sale funds belong to the beneficiaries.
Heirs may take out a new forward loan to pay off the reverse mortgage. This replaces the lien with a regular mortgage in their name.
If there is more than one heir, one can purchase the home themselves by taking out a conventional mortgage and buying out other beneficiaries' ownership shares.
Another option when there are multiple heirs is to force a courthouse auction sale. Proceeds are then divided based on ownership percentages.
And then there’s the option of simply walking away. In that case, the heir or heirs relinquish interest in the property. But they must inform the lender of their intention.
If the heir does not want the home and its mortgage obligation, the lender can't force repayment from an heir's own assets or income.
What heirs cannot do is assume the existing reverse mortgage. This violates HUD rules because these loans end when the original borrower dies or moves out.
The key is that heirs are not personally liable for the reverse mortgage debt. Their only obligation is to settle the loan if they wish to keep the home.
How long do heirs have to pay off a reverse mortgage?
When a borrower with a reverse mortgage dies, heirs typically have up to six months to resolve the loan before the lender can begin foreclosure proceedings.
HUD rules require lenders to delay foreclosure during this window so heirs have reasonable time to:
- Repay the loan and keep the property
- Sell the home and settle the mortgage
- Walk away from the property if desired
However, some proprietary reverse mortgages may impose shorter windows–as little as 30 days—for heirs to take action. So, it's critical to verify timing with the specific lender.
Acting promptly is wise, even if heirs need the full six months. The reverse mortgage balance grows each month as interest accumulates. This makes satisfying the lien more expensive the longer heirs wait.
Evaluating these options against keeping or selling the home directly can clarify the ideal path forward.
What else should you know about inheriting a home with a reverse mortgage?
Inheriting property with an outstanding reverse mortgage can certainly create headaches. But heirs can take proactive steps to avoid the most common pitfalls:
Learn about the loan immediately — Ask the estate executor for reverse mortgage documents. Don't delay investigating details that will impact inheritance.
Get loan counseling — Consult unbiased HUD counselors to understand responsibilities and choices for resolving the reverse mortgage.
Have a plan ready — Line up financing options in case heirs decide to purchase the home and pay off the loan.
Act quickly — As soon as permitted, satisfy the reverse mortgage within the designated timeline. Don't jeopardize ownership with delays.
Seek legal advice — Talk to a real estate attorney if the lender pressures heirs or disputes arise between beneficiaries.
The bottom line? Advance preparation and prompt action are key to ensuring a smooth transition when inheriting a home still tied to a reverse mortgage.
While receiving property with an outstanding reverse mortgage complicates the inheritance process, heirs ultimately have choices.
They are not necessarily stuck fully repaying the loan or losing the home. With proper planning, heirs can resolve the situation in a mutually agreeable manner.
Seeking counsel from lenders, HUD, and legal experts provides the knowledge to make an informed decision. Acting quickly once permitted also prevents heirs from losing their inheritance rights.
Thankfully, with a balanced approach, a house with a reverse mortgage doesn't have to turn into a financial burden for those who inherit it.