Let’s say that you just found out that you inherited a house from a loved one who passed away. Rejoice! However, soon after, you receive a bill in the mail. It’s from the deceased person’s lender stating that a reverse mortgage was taken out on the property, and that the loan balance is due in full. Not only this, you only have 30 days from receiving the due notice to repay the debt! Yikes! Although this may come as an unexpected and unpleasant surprise, don’t panic. You found this guide at just the right time. There are several options available to you. If you inherited a house with a mortgage, keep reading to find out what actions you can take and resolve this urgent issue.
Can You Inherit a House With a Reverse Mortgage?
Yes, inheriting a house with a reverse mortgage is possible. If a loved one decides to take out a reverse mortgage on the home, and then chooses you as the heir to that home, then you would inherit the home with the reverse mortgage on it.
When the homeowner who took out the reverse mortgage passes away, the balance of the reverse mortgage becomes due. This can be quite the hefty bill, because the homeowner doesn’t have to make any loan payments during their lifetime. This means that the responsibility for making sure the mortgage is paid off falls on you, the heir.
Luckily, there are a few options available to you, explained next.
What Happens If I Inherit a House with a Reverse Mortgage?
If you inherit a house with a reverse mortgage, there are a few things that can happen.
First, you’ll want to understand your relationship with the decedent who bequeathed the property to you. There is a different set of circumstances for a surviving spouse versus an heir who is not the spouse of the deceased. This is often a child, grandchild, a niece or nephew, or other close relative.
If you are the surviving spouse, chances are, you won’t have to take any further action. You will simply inherit the house and continue benefiting from the reverse mortgage payments. It’s important that you understand, however, that this will eventually affect your own heirs. The house becomes a part of your estate and the reverse mortgage along with it. (That is, unless you decide to sell the house or pay off the loan.) This applies if you are on the loan as a co-borrower, or if you are treated as an eligible non-borrowing spouse. If you are not a co-borrower or for some reason do not qualify as a non-borrowing spouse, then the following set of options apply to you as well.
If you inherit a reverse mortgage property and are not an eligible co-borrower or spouse, then you will be responsible for paying off the loan in full. Hopefully, your grantor (the person who bequeathed the property to you through their estate plan) had a discussion about this before their passing and went over your options with you.
There are typically three options for satisfying the reverse mortgage debt with the lender:
Sell the property and use the proceeds to pay off the mortgage
Keep the property and take out a “forward” mortgage to pay off the reverse mortgage balance
Pay off the mortgage and keep the property by using estate or personal funds
If you’re not attached to the property, then it makes sense to sell it and use the proceeds to satisfy the debt. If you’re lucky, the house could sell for more than the mortgage balance. If this is the case, you’d be able to pocket the difference. Most reverse mortgages provide a safety net so that you don’t have to pay more in case the current market value is less than the mortgage.
If you wish to keep the property in your estate, then you’ll have to pay the reverse mortgage balance in full. Hopefully, your deceased loved one made arrangements such that you are provided with a source of funds to pay off the loan. This could be through life insurance policy proceeds or the liquidation of other assets. If not, you may be forced to use your own funds.
A final option that could be used as a last resort is a foreclosure. If you don’t satisfy the debt, then the lender has the legal right to take over the property through the foreclosure process to recuperate the costs. This essentially means you’re signing over the deed to the lender, which you can do proactively rather than waiting for the lender to take legal recourse.
Timeline of Inheriting a House with a Reverse Mortgage
One of the major issues of inheriting a house with a reverse mortgage is the strict timeline you’re given. You may already be reeling from the fact that you just inherited a property with a major debt on it. To make matters worse, the bank is telling you that you have a short timeline to pay it off. Be ready to move quickly if you ever find yourself in this scenario!
Here’s a timeline of what happens when the owner of a reverse mortgage home passes away:
30 days: When a lender receives the notice of death of a borrower, they will send a Due and Payable notice to the estate of the decedent. They are typically notified within 30 days of the death.
60 days: The heir receives the notice stating information about the reverse mortgage debt and their options. They are typically given 30 days to pay off the debt in full or take other actions. If the heir is a surviving non-borrowing spouse, then they have 30 days to apply for a deferral through the Department of Housing and Urban Development (HUD).
6 months: Heirs must immediately choose how they want to proceed with satisfying the loan balance. A lender can start the foreclosure process within 6 months of the death of the borrower.
1 year: Heirs can apply for two three-month extensions at a time, so long as they are approved by the HUD and are able to prolong getting foreclosed upon. If successful, this gives them one calendar year from the death of the decedent to pay off the mortgage.
Commonly Asked Questions About Inheriting a Reverse Mortgage
When inheriting a reverse mortgage, you’ll naturally have several questions that come to mind. The lender will hopefully do a good job of explaining your options and answers to other common questions. Here are some popular questions about what to do when inheriting a reverse mortgage.
Can you sell a house that has a reverse mortgage?
Yes, one of the key options when inheriting a house with a reverse mortgage is to sell it. Your proceeds will be used to pay off the reverse mortgage loan. You get to keep any remaining equity in the house. If the current market value of the house is under the balance of the mortgage loan, don’t worry. Most reverse mortgages have a cap on how much you have to pay. For instance, the federally insured HECM (home equity conversion mortgage) gives you the option of paying the mortgage balance or 95% of the home’s market value, whichever option is less.
Can a family member take over a reverse mortgage?
Unfortunately, no. You cannot add a family member to an existing reverse mortgage. However, the surviving spouse may be eligible to continue receiving benefits by applying for a deferral through the HUD, even if they were not originally on the loan as a co-borrower.
Can I walk away from a reverse mortgage?
Yes, you can walk away from a reverse mortgage in essence. If you believe that the loan balance exceeds what the house can reasonably be sold for, simply hand over the house to the lender. This is executed through a deed in lieu of foreclosure. This can save you time, effort, and stress because the lender will handle the process of selling the house to recuperate the mortgage loan debt.
However, you should put in the effort of selling the house yourself if you believe the market value of the house exceeds the loan balance. This is because you only have to pay the balance and can pocket the remainder of the proceeds from the sale.
Learn More About Reverse Mortgages
If you recently inherited a house with a mortgage (that is, a reverse mortgage) know that you have several options. As you learned through this guide, the lender doesn’t give you much time, so it’s important to take action right away.
To learn more about reverse mortgages, be sure to check out our other educational guides on the topic!
What happens if you inherit a house with a reverse mortgage?
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