Reverse mortgages, designed for homeowners who are age 62 or older who have home equity, can provide cash to use for living expenses or other costs.
A reverse mortgage allows homeowners 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 home equity is used as collateral.
When the borrower dies, the loan balance becomes due. If the borrower's heirs inherit a home with a reverse mortgage, they generally have 30 days to buy the home, sell it, or turn it over to the lender. However that 30-day deadline can often be extended for up to six months to allow heirs time to buy the home or secure financing to buy it.
Because inheriting a reverse mortgage can be complex. heirs may encounter several problems such as paying off the mortgage or keeping the home. Learn more about the most common issues you may face and how to potentially avoid them.
- The process for inheriting a property with a reverse mortgage depends on several factors, including when it was originated.
- Despite recent reforms, a widow or widower could potentially lose the home upon their spouse’s death.
- If you inherit a home with a reverse mortgage, you will need to pay back the mortgage in full within 30 days, but you may receive an extension for six months.
- If you are unable to sell a home you inherited for more than the outstanding debt, you won’t be responsible for the difference, but you won’t receive money from the sale.
- If you plan to leave a home with a reverse mortgage to heirs, you can create an estate plan to reduce confusion.
Inheriting a Reverse Mortgage as a Spouse or Co-Borrower
You can inherit a home with a reverse mortgage, but you will be responsible for settling the debt, either by paying it off, selling the home, or turning it over to the bank.
If you inherit a home with a reverse mortgage from a spouse, the rules can depend on several factors:
- Whether you are a co-borrower. If you are a co-borrower, you can remain in the home and receive reverse mortgage payments. If you are not, you must pay off the reverse mortgage within 30 days, with a potential six-month extension.
- When you took out the reverse mortgage. If you are not a co-borrower on the reverse mortgage, you still may be able 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 you will be able to keep the home without paying off the debt. 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 originated and at the time of the borrower's 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.
A reverse mortgage creates problems for heirs in some cases. Though both spouses have to consent to reverse mortgage loans, both don’t have to be named as co-borrowers. If both spouses hold the title and are borrowers on the reverse mortgage, then the surviving spouse may continue to hold the reverse mortgage and can continue living in the house.
But if two spouses live together in a home and only one is the borrower, then the other spouse is at risk of losing the home if the borrower dies.
Check with your reverse mortgage provider to make sure that you and your co-borrower are both on the loan if that's what you intended. If both spouses are not listed, you can work with your lender to correct the issue to minimize future problems for the heir.
Reverse Mortgage Problems for Heirs
If you inherit a property with a reverse mortgage and you are neither a co-borrower nor the spouse of the borrower, 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 funds or other funds.
- Pay off the balance of the reverse mortgage in full by obtaining a traditional mortgage on the property.
- Pay off the reverse mortgage with the proceeds from selling the property.
If you want to keep the home by paying off the debt, you will have to repay either the full loan balance or 95% of the home’s appraised value, whichever is less. Alternatively, you could sell the home to pay off the debt and generate cash, which is the most common option, according to the Consumer Financial Protection Bureau.
Heirs who want to keep the home can face problems if it has a reverse mortgage that they cannot repay. A traditional fixed-rate forward mortgage can offer these heirs a funding solution, but they may not always qualify. If they cannot repay the debt, the home must be sold to satisfy the reverse mortgage debt.
A second problem may arise for heirs who are expecting money from the sale of a home that has a reverse mortgage. If the property sells for less than the amount of debt outstanding, the heir would receive no cash from the sale. A property may sell for less than the outstanding reverse mortgage if home values have declined, if it has physically deteriorated or been damaged, or if the borrower outlived the lender's life expectancy.
However, heirs are not responsible for paying outstanding debt after the proceeds from the home sale are applied. Instead, Federal Housing Administration (FHA) insurance covers the lender’s shortfall.
Problems can arise more easily when heirs are not aware that they will receive a home with a reverse mortgage. Prepare any non-borrowing family members living in the home by communicate with them, so they know what to expect.
Inheriting a Reverse Mortgage: Deadlines
Another source of problems with inheriting a reverse mortgage can be the deadlines for repayment. Here are some key deadlines:
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.
What Happens if I Inherit a House With a Reverse Mortgage?
The process for inheriting a house with a reverse mortgage depends on your relationship to the deceased borrower and a number of other factors. You may need to pay back the mortgage withing 30 days or up to six moths. 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?
A family member cannot takeover a reverse mortgage unless they were a co-borrower. Instead, they must payoff the mortgage with funds or with a traditional mortgage to keep the property. Or they can sell the property and the resulting funds will be used to pay down the debt, with any remaining amount going to the heirs.
What Happens if a Homeowner With a Reverse Mortgage 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 depends on whether you are the spouse and/or the co-borrower of the mortgage, and when it was originated.
If you inherit home with a reverse mortgage, you will need to repay the debt within 30 days, or up to six months with an extension. Consider consulting a financial advisor to review all the options for your specific situation.