Inheriting a home can be a significant financial and emotional event. But when that home has a reverse mortgage, the process becomes more complex. In this article, we will explore what happens when you inherit a home with a reverse mortgage, the options available to heirs, and important considerations when managing this type of inheritance.
Understanding Reverse Mortgages
A reverse mortgage allows homeowners aged 62 or older to convert part of their home’s equity into cash. Unlike traditional mortgages, where borrowers make monthly payments, reverse mortgages provide payments to the homeowner. The loan is repaid when the borrower sells the home, moves out permanently, or passes away. At that point, the loan balance, which includes the amount borrowed plus accrued interest and fees, must be paid off.
What Happens When the Borrower Passes Away?
When the borrower of a reverse mortgage dies, the loan becomes due. The lender will require repayment of the loan balance, which is typically done through the sale of the home. However, heirs have several options when dealing with a reverse mortgage on an inherited home.
Option 1: Pay Off the Loan
Heirs have the option to keep the home by paying off the reverse mortgage. They can do this by either paying the loan balance in full or by paying 95% of the home’s appraised value, whichever is less. This can be done using personal funds, refinancing, or obtaining a traditional mortgage. Once the loan is repaid, the heirs will own the home free and clear.
Option 2: Sell the Home
If the heirs do not wish to keep the home, they can sell it and use the proceeds to pay off the reverse mortgage. If the home sells for more than the loan balance, the heirs keep the remaining equity. However, if the home sells for less than the loan balance, heirs are not responsible for the difference. The reverse mortgage is a non-recourse loan, which means the lender cannot seek additional funds from the estate or heirs beyond the sale of the home.
Option 3: Deed the Property to the Lender
In some cases, heirs may choose to walk away from the property by signing a deed in lieu of foreclosure. This means they voluntarily transfer ownership of the home to the lender, who then takes possession of the property. While this option absolves the heirs of any further responsibility, they will not receive any proceeds from the home’s sale.
Important Considerations for Heirs
- Timeframe for Decision: Heirs typically have 6 to 12 months to decide what to do with the home after the borrower’s death. During this time, they can explore their options, such as selling the home, refinancing, or paying off the loan.
- Property Value: Heirs should consider the current value of the home relative to the loan balance. If the home is worth significantly more than the loan balance, it may make sense to keep or sell the home. However, if the loan balance exceeds the home’s value, it may be better to sell or deed the property to the lender.
- Estate Planning: For homeowners with reverse mortgages, it’s important to communicate with heirs about the existence of the loan and the options available. Proper estate planning can help ensure a smooth transition when dealing with a reverse mortgage inheritance.
Inheriting a home with a reverse mortgage can be complicated, but with careful planning and understanding, heirs can navigate the process effectively. Knowing the options available and working with financial or legal advisors can help make the best decision for both emotional and financial well-being.
