Inheriting a House With a Reverse Mortgage: How to Handle It Step-by-Step | Mortgages

A reverse mortgage doesn’t have to be repaid while the borrower is living in the home. But when the borrower dies, the heirs usually need to turn in the home or repay the balance.

If the borrower on a reverse mortgage dies, the lender typically calls in the loan. However, if there’s a co-borrower on the reverse mortgage, this person can stay in the home and continue to draw funds.

For reverse mortgages with FHA case numbers assigned on or after Aug. 4, 2014, a nonborrowing spouse may be eligible to remain in the home without repaying the loan balance, as long as:

The nonborrowing spouse may not continue to draw money from the reverse mortgage.

“They would be protected and wouldn’t be foreclosed upon and left out on the streets, provided that they kept up the property, meaning that they still, outside of the mortgage, have to maintain the taxes and insurance, so it has to be in the same condition,” says Monique D. Hayes, partner at DGIM Law.

If the borrower and spouse were a same-sex couple who couldn’t legally get married when the reverse mortgage was issued, the spouse can qualify if they were legally married when the borrower died.

For reverse mortgages with earlier case numbers, the lender may allow the nonborrowing spouse to qualify to remain in the home through the mortgagee optional election assignment process. The spouse must show that they were married to the borrower from the time the loan was issued until the borrower’s death and that they have lived in the home as their primary residence. For same-sex couples who could not legally marry when the borrower took out the reverse mortgage, it’s sufficient if they were legally married at the time of the borrower’s death.

Other heirs are not responsible for paying back the loan, but they’ll want to make a plan and advise the lender.

“There is no personal liability on the heirs for that house or for the mortgage. They didn’t sign the mortgage. But the house will secure the mortgage and even if they walk away, there will be a foreclosure by the lender on the house,” says Beth Miller, partner at law firm Fox Rothschild.

When the reverse mortgage becomes due, you have 30 days to notify the lender of how you want to proceed. Heirs who aren’t eligible spouses have the following options.

One way to keep the home is to refinance the reverse mortgage into a traditional “forward” mortgage. You take out a new loan to pay the outstanding balance on the reverse mortgage. Then, you make monthly payments on the new mortgage.

Alternatively, you can use savings or sell another asset to pay off the balance. For example, if you were living in another house and plan to move into the house you inherited, you could sell your current home and use the proceeds to repay the reverse mortgage.

If you don’t intend to keep the home, you could sell it and use the proceeds to pay off the reverse mortgage. Once you pay the reverse mortgage balance and satisfy any other liens on the property, any money left over from the sale is yours to keep.

You might not want to deal with the process of selling the house, or maybe you don’t expect there to be any equity in the home if you sell. In those cases, you can sign the house over to the reverse mortgage lender with a deed in lieu of foreclosure. Some lenders may offer incentives to sign over the house. For example, they might give you extra time to get personal belongings removed from the property, or they might provide financial help to relocate if you’ve been living in the home.

Or, you can do nothing and walk away from the home. This won’t hurt your credit, but it’s not the best course of action because you’re giving up any equity or incentives you might otherwise receive.

Lenders will typically try to come to an agreement with you rather than go through the expense of foreclosure.

“Foreclosures are a very lengthy process, so they usually always try to work with the heirs to see if something can be resolved prior to doing a foreclosure,” says Jacqueline Salcines, owner and founder at real estate and business law firm Jacqueline A. Salcines PA.

If the house is worth less than the reverse mortgage balance, the heirs don’t have to make up the difference. They can pay the lesser of the full balance or 95% of the appraised value of the property.

Some lenders may be open to negotiating in this situation.

“The heirs may reach out to us and say, ‘Oh, we got the letter. Obviously we can’t pay it. The house isn’t worth it. Can you negotiate it for us?’ And what we do is we negotiate for a short payoff, which is sometimes 80%, 85% of the actual mortgage balance,” Salcines says.

Inheriting a house with debt always involves doing some extra homework, and if the home has a reverse mortgage, there’s a specific timeline that must be followed. Here are the steps to get out of a reverse mortgage after the borrower’s death.

1. Notify the lender of the borrower’s death. If you can’t find any documents related to the reverse mortgage, you may need to contact the local recorder of deeds to find out who the lender is.

2. Go through the probate process. Determine if you are the heir of the home and if the deceased person has left any instructions regarding the reverse mortgage. “Sometimes if there’s a will, it may say, pay the reverse mortgage out of my other assets. So you always have to make certain that the will either does not say that, or if it does say that, that there are other assets available to pay off that debt,” Miller says. If the borrower was your spouse, determine if you are eligible to remain in the home without paying the reverse mortgage balance.

3. Show the lender that you are the beneficiary of the home. Depending on your state’s laws, you might have to get a short certificate, letters testamentary or other documentation to prove that you have the legal authority to make decisions about the property.

4. Assuming you aren’t an eligible spouse, you receive a due and payable statement from the lender. The lender orders an appraisal and shares the results with you. The lender also informs you of the 30-day deadline to come up with a plan for the property.

5. Tell the lender if you’re choosing to keep the home, sell the home or give a deed in lieu of foreclosure.

6. You now have six months to follow through on your decision. If you’re selling the home, hire a real estate agent and list the home for sale. If you’re refinancing, shop for a loan and complete an application. If you opt to sign over the home, the lender prepares a deed in lieu of foreclosure and associated affidavits for you to sign and return.

7. If you aren’t able to sell the home or secure financing within six months, you can apply for up to two 90-day extensions.

8. If you’re selling or signing over the home, remove all personal belongings from the property. You may want to take pictures of the home for your records.

9. Continue to pay taxes, insurance and homeowner association fees related to the property. Maintain the property in good condition, even if you’re giving up the home. “If they don’t tend to those responsibilities, it is likely that a lender would step in and take over more quickly and at a greater expense and reduction of whatever equity is in the property,” Hayes says.