What Happens if You Inherit a House With a Reverse Mortgage

Inheriting a House With a Reverse Mortgage?

A reverse mortgage is a loan that relies on the homeowner’s equity in the house, and it becomes a significant concern when you inherit a home with a reverse mortgage. When the borrower dies, and their heirs inherit the house, there are three possible outcomes:

• The heirs can sell the house to pay off the mortgage

• The heirs can keep the house by refinancing the loan

• The lender can sell the home

Reverse mortgages come in different types, but they all typically have the same features:

• Older borrowers can get bigger loans than younger borrowers.

• The mortgage has to be the primary debt against the house. Other loans need to be paid off before taking on a reverse mortgage.

• Financing fees are included in the loans.

• The lender can demand the loan balance early if the homeowner doesn’t maintain or insure the property or pay its taxes.

Understanding Reverse Mortgages

A reverse mortgage is a type of loan that allows homeowners aged 62 or older to convert a portion of their home’s equity into cash. Known as a Home Equity Conversion Mortgage (HECM), this loan is designed to help seniors access the equity they have built up in their homes. The reverse mortgage loan is used to pay off any existing mortgage on the home, and the remaining equity is given to the borrower in various forms, such as a lump sum, monthly payments, or a line of credit.

However, homeowners are still responsible for paying property taxes, insurance, and maintaining the home. These obligations are crucial to keep the reverse mortgage in good standing and avoid any potential foreclosure.

How Does a Reverse Mortgage Work?

A reverse mortgage works by allowing homeowners to borrow money against the value of their home without the need to make monthly mortgage payments. Instead of making payments to the lender, the loan balance grows over time as interest and fees accumulate. The homeowner must repay the loan when they pass away, sell the home, or vacate the property.

The repayment of the loan is triggered when the borrower moves out of the home, sells the home, no longer lives in the home full-time, or passes away. At that point, the full loan balance, including any accrued interest and fees, becomes due.

Eligibility and Application Process

To be eligible for a reverse mortgage, homeowners must meet several criteria:

• Be at least 62 years old.

• Own their home outright or have a low balance on their existing mortgage.

• Occupy the home as their primary residence.

The application process typically involves contacting a reverse mortgage lender, submitting an application, and undergoing a financial assessment to determine eligibility. This assessment ensures that the borrower can meet the ongoing obligations of the loan, such as paying property taxes and insurance.

Benefits and Risks of Reverse Mortgages

Benefits:

The benefits of reverse mortgages include:

• Tax-free cash: The money received from a reverse mortgage is tax-free and can be used for any purpose, providing financial flexibility.

• No monthly mortgage payments: Homeowners do not have to make monthly mortgage payments, which can significantly improve their cash flow.

• Flexibility: Reverse mortgages offer flexible payment options, including lump sums, monthly payments, or lines of credit, allowing borrowers to choose the option that best suits their needs.

• Non-recourse loan: Reverse mortgages are non-recourse loans, meaning that the borrower or their heirs will never owe more than the value of the property. This provides peace of mind that the debt will not exceed the home’s value.

Risks:

The risks of reverse mortgages include:

• Accumulating debt: The loan balance grows over time, and the homeowner may end up owing more than the value of the property, especially if the home’s value decreases.

• Fees and costs: Reverse mortgages come with various fees and costs, including origination fees, servicing fees, and mortgage insurance premiums, which can add up over time.

• Impact on government benefits: Reverse mortgages can affect eligibility for certain government benefits, such as Medicaid and Supplemental Security Income (SSI), potentially reducing the financial assistance available to the homeowner.

• Risk of foreclosure: If the homeowner fails to pay property taxes or insurance, the lender can foreclose on the property, leading to the loss of the home.

It’s essential to carefully consider the benefits and risks of reverse mortgages before making a decision. Homeowners should consult with a financial advisor or a reverse mortgage counselor to determine if a reverse mortgage is right for them.

What Happens if You Inherit a House With a Reverse Mortgage?

If the borrower of a reverse mortgage dies, the reverse mortgage loan is passed on to whoever inherits the house, presenting various options and challenges. Here’s what the process of inheriting a house with a mortgage looks like.

As the heir of a reverse mortgage borrower, you must notify the lender of the borrower's death to trigger the repayment process.

First, the lender needs to be notified of the borrower’s death. The contract requires the estate executor or heir to inform the lender about the homeowner’s death.

This triggers the repayment process. The lender will send the heir a due and payable notice with all their options. But the real question is, how long do heirs have to pay off a reverse mortgage?

As an heir to a house with a mortgage, you don’t have too much time to wait. In most cases, the lender will give up to six months to repay the loan. You may be wondering: can you negotiate a reverse mortgage payoff? Well, you can request extensions, but you’ll get six months at most.

To get an extension, you’ll also need to provide evidence of your efforts to repay the loan, such as putting the house up for sale.

Handling a Reverse Mortgage on an Inherited House

So, once you’ve inherited a house with a reverse mortgage, how do you handle this loan? Handling a reverse mortgage debt requires careful consideration of your financial situation and the available options. Here are three ways you can handle this:

1. Paying Off the Loan

If you want to keep the property, you can pay off the reverse mortgage loan balance by:

• Using personal funds

• Taking out a new mortgage if your credit is good

• Getting a home equity loan or line of credit.

2. Selling the Property

Most heirs choose to settle the reverse mortgage by selling the home. This can be practical if the loan balance is close to the property value or if you don’t want to keep the property. When selling the property, it's important to consider the appraised value to ensure you cover the loan balance and potentially retain some equity. You can keep the remaining funds if the house sells for more than the loan balance.

Keep in mind that this kind of mortgage is a non-recourse loan. The FHA insurance will pay the difference if the sale doesn’t cover the loan balance. As an heir, you won’t be personally liable.

3. Deed instead of Foreclosure

If you can’t sell the house, you can opt for a deed instead of foreclosure. That means you’ll need to transfer the property title to the lender. This helps you avoid a lengthy foreclosure, especially if there's no equity left in the home.

4. Letting the Home Go to Foreclosure

If you decide not to act, the lender can initiate foreclosure to cover the reverse mortgage balance. This may impact your credit scores, but it’s still a valid legal process to cover the loan balance. You are not personally liable beyond the property value.

Reverse Mortgage Problems for Heirs

Inheriting a house with a mortgage isn’t easy. It comes with multiple consequences you may not have been ready for. These consequences are mainly fiscal – here’s what you can expect.

• Estate Taxes: Most estates fall below the threshold for federal estate taxes, but you still need to check current laws as they can change. Some states also impose their own estate or inheritance taxes, which could affect the property value.

• Inheritance Tax: Some states have an inheritance tax, which isn’t the same as an estate tax. Inheritance tax is paid by the heir rather than the estate. Whether this applies depends on the heir's relationship to the deceased.

• Capital Gains Tax: If the heirs decide to sell the property, they might face capital gains tax on the difference between the sale price and the home's "stepped-up" basis. If the home is sold shortly after inheriting, the capital gains might be minimal.

• Property Taxes: Heirs are responsible for ongoing property taxes, but there may be relief programs available for seniors, veterans, or disabled individuals.

• Repayment of the Reverse Mortgage: The loan becomes due and payable once the borrower passes away. Heirs need to decide whether to pay off the loan, sell the home, or let the lender take control.

• Insurance and HOA Fees: Homeowners' insurance and homeowners' association (HOA) fees are also the heirs' responsibility. 

The main consequence that heirs are worried about is, “Can you lose your house with a reverse mortgage?” Yes, you can, but only if you fail to pay off the loan in the given time. In that case, the lender may choose to foreclose the house. 

Navigating Legal and Financial Aspects 

The inheritance of a house with a mortgage comes with various legal and financial complications. As an heir, you may not have been prepped to navigate them. 

1. Seek Professional Advice

First and foremost, consult a reliable attorney. An attorney will provide legal advice specific to your situation, help you understand the reverse mortgage terms, and guide you through your options.

You could also hire a financial advisor to deal with the impact of inheriting property with a reverse mortgage. They can offer insights into whether you should sell, refinance, or retain the property.

These properties also come with tax complications, so consider hiring a tax professional to discuss liabilities or benefits. Take this opportunity to learn more about estate, inheritance, and capital gains taxes.

2. Understand Your Rights and Obligations

As an heir, you have the right to clear communication with the lender. Ensure you get all the necessary information regarding the timeline for settling the loan balance and your options. More importantly, read the fine print – you must know every detail about the mortgage terms.

You also have the option to refinance the reverse mortgage using a traditional mortgage if it suits your financial situation.

You also have the right to sell the property to settle the reverse mortgage and keep any remaining equity. You can request the lender to give you more time to sell the property or arrange financing to pay off the loan.

3. Assess the Property's Value 

Knowing your home's current market value can help you make informed decisions about selling or retaining it. Hire professionals and take the time to do your research. You can also request a statement from the lender detailing the total amount owed, including any interest and fees.

4. Prepare for the Process

Keep all relevant documents organized and easy to access. That includes:

• The original reverse mortgage agreement

• The homeowner's death certificate

• Any communication with the lender

If you're not the sole heir, keep an open line of communication with others with an interest in the property. 

Impact on Family Members and Relationships

Before taking on a reverse mortgage, consider the impact of inheriting a house with a reverse mortgage on your heirs. How will it impact your family members and relationships? 

The death of a loved one can be jarring and hard to deal with, and dealing with their estate is just an additional stressor. Plus, it’s not as simple as any other estate management. 

Houses with reverse mortgages are complex – heirs need to act quickly despite their financial limitations. This can lead to conflicts over various topics, including:

• Differing Opinions on Handling the Property: Family members may have different views on selling the house, paying off the reverse mortgage, or letting the lender take it. These decisions can lead to fights, especially if certain parties are emotionally attached to the house.

• Unequal Financial Contributions: If one or more family members decide to pay off the reverse mortgage to keep the house, they may not come eye to eye over equity shares, repayment, and future use of the property.

• Distribution of Assets and Debts: The reverse mortgage might take up a significant portion of the estate's assets, leading to disputes over the distribution of the remaining assets. Plus, if the home's sale doesn't cover the loan, family members might worry about who needs to pay the rest. Luckily, in this case, the FHA insurance will cover the difference.

What’s the Next Step?

As an heir of a house with a reverse mortgage, you may be blindsided by the many complications. The process can look different based on whether you’re a spouse or co-borrower. 

For most, the best course of action is to sell the house to pay off what you can and let the FHA cover the difference. But if the house has sentimental value, that doesn’t have to be your only option. 

Not sure what the ideal next step is? Let’s talk finances – contact our expert financial advisors today and secure your legacy!