Inheriting a property with a reverse mortgage can be complex. When you inherit such a property, you should settle the mortgage. You must decide what to do about the property and the possible financial burden. The property may have sentimental value, making it difficult to release. However, making on-time payments is crucial. You must understand the long-term implications of your decisions and weigh them against your plans.
Here's what you need to know about inheriting a property with a reverse mortgage.
Key Points
- When you inherit a house with a reverse mortgage, communicate with the lender promptly to understand your options and obligations.
- Seek professional advice
- Consider the financial implications and plan for the future
Understanding Reverse Mortgages
A reverse mortgage allows homeowners over 62 to access part of their home equity. It provides a line of credit or regular payments based on the appraised property value. The borrower doesn’t have to make monthly payments; instead, the outstanding balance and interest accumulate over time. The loan becomes due when the house is sold, or the borrower moves or dies.
What Happens if You Inherit a House with a Reverse Mortgage?
If you inherit a house with a reverse mortgage, your inheritance includes the house and the remaining reverse mortgage balance. The reverse mortgage becomes due upon the borrower’s passing. You must decide how to pay the mortgage, interest and accumulated fees. Here’s what you need to do.
Inform the Lender Immediately
A crucial first step is to inform the lender of the borrower’s death, and to start the mortgage payoff process. Delays could result in penalties and jeopardize your options.
You should receive a “Due and Payable” notice within 30 days of notifying the lender. The notice should contain the outstanding amount, accrued interest and any fees.
The notice should also contain the details on settling the outstanding amount. You should have options. These include settling the balance in full, selling the house and deeding the property rather than foreclosing. Reply promptly. Missed deadlines could negatively affect your rights and options.
Update the Name on the Deed of the House
The deed is legal proof of ownership of a property. Transferring the property from the deceased owner into your name will give you the right to make decisions about the property. You can’t sell or keep the property unless it is in your name.
An updated deed signifies to the lender that you are responsible for repaying the mortgage. It also ensures that the tax authorities are informed, avoiding future problems.
Keep the Home
If you decide to keep the home, you must pay the reverse mortgage balance in full. If you qualify, you can negotiate a refinanced mortgage. Carefully consider your plans before deciding to keep or dispose of the property.
You may decide to keep the property for a couple of reasons. If it holds considerable sentimental value, you may keep it even if it means financial sacrifice. You may also choose to keep it if it has high potential as an investment.
Once the reverse mortgage is paid, you’ll own the house and benefit from any future property appreciation. On the downside, paying a reverse mortgage may be a significant financial burden, especially if the loan balance is high.
Assess your financial resources carefully before committing to keeping the house. Remember to factor in the costs of maintenance and property taxes.
Sell the Home
Selling the property on the open market may be a better option. It will release you from any further financial commitment to the property. You will use the proceeds of the sale to pay the lender. Any remaining equity will form part of your inheritance. The sale must generate enough money to repay the reverse mortgage in full, with any accrued interest and fees. Carefully consider this aspect before you decide to sell.
If the property value is stagnant or declining, selling it could save you from a future financial burden. On the downside, you may lose out on any potential property appreciation.
Sign a Deed in Lieu of Foreclosure
If the property value is significantly lower than the outstanding reverse mortgage, the funds from the sale may not cover the loan in full. A deed in lieu of foreclosure (DIL) could help you avoid the burden of outstanding debt.
Similarly, if you don’t have the funds to pay the loan or sell the house to cover the balance, you could walk away from any financial obligation by signing a DIL. Seek the advice of a tax consultant to understand whether there are any tax implications attached to this choice.
When you sign a DIL you forfeit ownership to avoid a formal foreclosure. Many people prefer to voluntarily surrender the property because foreclosure takes considerable time and can damage your credit score.
Take No Action
This is an ill-advised strategy, though it may seem like the easiest route. When the borrower dies, all outstanding amounts become due. If you fail to communicate with the lender, the loan will default, and the lender can initiate foreclosure proceedings.
You could lose the property during the foreclosure process, and it will stay on your credit report for years, impacting your credit score. Late fees and penalties may add to your financial load. The longer you wait the fewer options you’ll have.
What Happens if You Are the Spouse Who Inherits a House with a Reverse Mortgage?
In this instance, there may be three scenarios, discussed below.
Co-Borrower
As a co-borrower, you have the right to continue living in the home and will continue to receive the proceeds of the reverse mortgage in line with the original agreement.
The mortgage repayment does not become due on the death of your spouse. You have the time and flexibility to decide your future course of action. You should, however, let the borrower know about the death of your spouse as soon as possible.
The lender may reassess the loan terms based on your income and creditworthiness as an individual borrower. This re-evaluation may affect the amount you receive in reverse mortgage payments.
Eligible Non-Borrowing Spouse
As an eligible non-borrowing spouse, the house must have been your primary residence for a given period, often defined as at least one year, before the borrower passed. You have the right to continue occupying the house as your primary residence.
Your mortgage terms will dictate whether you can defer mortgage repayment for any period following the death of your spouse. Deferment could provide an opportunity to decide on the long-term plans for the loan.
Contact the lender promptly after the death to find out your rights and options. Consider your long-term plans and factor in your ongoing property expenses when deciding your actions.
Ineligible Non-Borrowing Spouse
Inheriting a house with a reverse mortgage as an ineligible non-borrowing spouse presents the most challenging situation. Unlike eligible non-borrowing spouses, you don't have the right to defer reverse mortgage repayment. Your right to continue living in the house might be restricted, depending on the lender's policies and the loan terms.
Inform the lender of your spouse’s death and consult the terms and conditions to understand your rights and options. There may be strict deadlines that you must adhere to. Act quickly to avoid default.
Consult a financial consultant and, if necessary, an estate attorney.
Steps to Take if You’re Inheriting a Property with a Reverse Mortgage
There are several steps to take when you inherit a reverse mortgage.
- Find the loan documents: Understand the terms and conditions.
- Property appraisal: Get a professional appraisal to understand the property value.
- Understand your options and timelines: The mortgage becomes due on the borrower’s death. You must pay the outstanding balance, accrued interest, and fees. The lender should send you a “due and payable” notice. This will detail the amounts due and due dates.
- Seek professional advice: Understand the financial implications of your options.
- Communicate with the lender: Maintain ongoing and prompt communication with the lender throughout the process.
Compare the Best Reverse Mortgage Lenders from Benzinga’s Top Providers
If you’re looking for a reverse mortgage, you should find a provider to meet your needs on the below chart.
Know Your Rights and Obligations
Inheriting a property may offer you the opportunity to enter the property market for the first time or expand into the rental market. You must, however, understand your options and seek professional advice. Sometimes selling the property or letting it go may be your best option. Know your rights and obligations and you could turn a challenging situation into a positive opportunity.
Frequently Asked Questions
Do heirs have to pay back a reverse mortgage?
The reverse mortgage must be paid but there are options such as selling the house, paying off the mortgage, or surrendering the property to the lender.
Can an heir refinance a reverse mortgage?
Unless the heir meets the eligibility criteria for a reverse mortgage, they cannot refinance with a reverse mortgage. They can, however, apply for a traditional refinanced mortgage.
Can a family member take over a reverse mortgage?
A family member cannot take over a reverse mortgage. The mortgage contract terminates on the death of the borrower and the loan, and all accrued interest and charges must be paid back to the lender.