Reverse mortgages can provide much-needed cash for seniors whose net worth is mostly tied up in the value of their home. A reverse mortgage is a loan for homeowners who are age 62 or older and have considerable home equity.
A reverse mortgage allows seniors to borrow money against the value of their home and receive funds as a lump sum, a fixed monthly payment, or a line of credit. The entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.
If the borrower dies, their heirs may inherit the reverse mortgage. What happens next depends on several factors, including who is inheriting the loan. Generally, the loan must be paid off in its entirety, unless it is passed to a spouse. But inheriting a reverse mortgage can be a complex business, and there have been reports of problems caused by unresponsive lenders, unclear documentation, and reverse mortgages that shouldn’t have been granted in the first place.
In this article, we’ll take you through the most common problems that heirs may encounter when inheriting a reverse mortgage.
- The process for inheriting a property with a reverse mortgage attached is different depending on whether you are the spouse and/or the co-borrower of the mortgage, and when it was originated.
- Despite recent reforms, there are still situations when a widow or widower could lose the home upon their spouse’s death.
- If you inherit a reverse mortgage from your parents or grandparents, you will need to pay back the mortgage in full within a year (at most). To do that, you can pay the lender from your own funds, refinance the property, or sell it.
- 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
Many people will inherit a reverse mortgage from their spouse. In general, reverse mortgage loans must be repaid when the borrower dies, and this is normally financed by selling (or refinancing) the property.
However, special rules determine what happens to reverse mortgages if you lived with your spouse in a property with a reverse mortgage attached to it. The rules in this area are complex but mainly depend on several factors:
- 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). 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 married when the loan documents were signed and continued to be married up until your death. If this is the case, and your spouse took out the reverse mortgage after Aug. 4, 2014, you will qualify as an Eligible Non-Borrowing Spouse and will be able to stay in your home without paying back the reverse mortgage loan.
These complex rules can create problems. Though both spouses have to consent to reverse mortgage loans, both don’t have to be named as co-borrowers. If two spouses live together in a home but only one spouse is named as the borrower on the reverse mortgage, then the other spouse is at risk of losing the home if the borrowing spouse dies first (or has to move into an assisted living facility or nursing home for a year or longer). Only one spouse might be a borrower if only one spouse holds title to the house, perhaps because it was inherited or because its ownership predates the marriage.
Ideally, both spouses will hold title and will be borrowers on the reverse mortgage so that when the first spouse dies, the other spouse continues to have access to the reverse mortgage proceeds and can continue living in the house until death. It’s a good idea to check with your reverse mortgage servicer to make sure that your loan records are accurate and that you and your co-borrower are both on the loan. Call your servicer to find out what names are listed on your loan, and ask them to send you a paper copy for your records.
Aside from the potential for scams targeting the elderly, reverse mortgages have some legitimate risks. Despite recent reforms, there are still situations when a widow or widower could lose the home upon their spouse’s death.
Reverse Mortgage Problems for Heirs
If you inherit a property with a reverse mortgage taken out against it and you are neither a co-borrower nor the spouse of the person who has passed away, you must pay back the reverse mortgage to the lender. This can be done in three ways:
- Pay off the mortgage balance in full with estate or other funds.
- Pay off the balance of the reverse mortgage in full by obtaining a “forward” mortgage on the property.
- Pay off the reverse mortgage with the proceeds from selling the property.
The best option for you depends on whether you want to keep ownership of the property. If you do, you should choose option 1 or 2. You will have to repay either the full loan balance or 95% of the home’s appraised value, whichever is less.
If you either can’t pay the mortgage balance through other means or don’t want to keep the inherited house, you can choose option 3. This is the most common option. According to the Consumer Financial Protection Bureau, most heirs will sell the house to generate the needed cash.
This process can be a source of problems and distress for families inheriting a house. It’s one of the reasons why reverse mortgages aren’t recommended for seniors who want to leave property to their heirs. A traditional fixed-rate forward mortgage can offer these heirs a funding solution to securing ownership, but they may not qualify for such a loan. In that case, a cherished family home may sell to a stranger to quickly satisfy the reverse mortgage debt.
A second problem may arise if, having decided to sell the home to satisfy this debt, the price that you are able to get for it is lower than the amount of debt outstanding. This could happen if the property has physically deteriorated or been damaged, home values in the area have declined, or the borrower outlived the life expectancy table used by the lender to determine the original loan amount.
In this case, you are protected. If the home sells for more than the outstanding loan balance, then the leftover funds go to one’s heirs. If a home sells for less, then heirs receive nothing, and Federal Housing Administration (FHA) insurance covers the lender’s shortfall. In other words, the reverse mortgage repayment amount can’t exceed the proceeds from a sale of the property. If a mortgage balance remains after the sale, the estate of the homeowners isn’t held responsible for that amount.
So, you may not have a house to inherit, but you won’t have a debt to repay, either.
Many problems are caused by heirs not being made aware that their parents or grandparents have a reverse mortgage. Prepare any non-borrowing family members living in the home by deciding together what they will do after you die, so they know what to expect.
Inheriting a Reverse Mortgage: A Timeline
Another major source of problems when inheriting a reverse mortgage is the tight schedule involved with doing so. No matter what your relationship is to the person who has passed away, you will need to move quickly to ensure that you maintain control over what happens to their property.
Here’s a typical timeline for what happens to a reverse mortgage after the original borrower passes away:
Most lenders subscribe to databases that track death certificates. Within 30 days of getting a notice of death of the borrower, the lender sends a Due and Payable Notice to the estate. The notice contains information for how heirs may proceed:
- Satisfy the remaining loan balance of the reverse mortgage
- Sell the property for at least 95% of the appraised value
- Provide the lender with a deed-in-lieu of foreclosure—i.e., give the house to the lender to sell
Along with this information on the reverse loan, the lender will also send over a list of eligibility requirements for a deferral period.
Heirs are required to get an appraisal of the home no later than 30 days after the Due and Payable Notice is sent. If there is a surviving, non-borrowing spouse, they may apply for a deferral if the requirements outlined by HUD are met.
Within this time frame, heirs must choose whether they want to sell the house to satisfy the reverse mortgage loan. Remember: The loan will continue to accrue interest during this time. Within six months of the borrower passing away, a lender can start the foreclosure process to satisfy the loan if no actions to repay the reverse mortgage are taken.
Heirs may be eligible to receive two three-month extensions to pay the reverse mortgage balance, subject to HUD approval. This gives heirs up to a full year from the death of the borrower to repay the loan balance or sell the home.
What happens if I inherit a house with a reverse mortgage?
It depends on your relationship to the deceased borrower, and a number of other factors. If you inherit a reverse mortgage from your parents or grandparents, you will need to pay back the mortgage in full within a year (at most). To do that, you can pay the lender from your own funds, refinance the property, or sell it.
Can a family member take over a reverse mortgage?
No. You can’t add a family member to an existing reverse mortgage.
What happens if the owner goes into a nursing home?
Reverse mortgages have residency requirements. If you go into a nursing home for an extended period of time, then the reverse mortgage loan will become due, the home may be sold, and any proceeds from the sale of the home may make you ineligible for government benefits.
The Bottom Line
Heirs may encounter a number of problems when inheriting a reverse mortgage. The process for inheriting a property with a reverse mortgage attached is different depending on whether you are the spouse and/or the co-borrower of the mortgage, and when it was originated. Despite recent reforms, there are still situations when a widow or widower could lose the home upon their spouse’s death.
If you inherit a reverse mortgage from your parents or grandparents, you will need to repay the mortgage in full within a year (at most). To do that, you can pay the lender from your own funds, refinance the property, or sell it. If you are unable to sell it for more than the outstanding debt, you won’t be held responsible for the loss, but you won’t receive money from the sale, either.
Communication is the key to avoiding these issues. Many problems are caused by heirs not being made aware that their parents or grandparents have a reverse mortgage. Prepare any non-borrowing family members by deciding together what they will do after you die, so they know what to expect.