What to Do When a Family Member Inherits a Reverse Mortgage?

When a family member inherits a reverse mortgage, it can be a source of distress and confusion. Unfortunately, you cannot add a family member to an existing reverse mortgage. If you have a home equity conversion mortgage (HECM), your heirs must repay the full balance of the loan or 95% of the home's appraised value, whichever is lower. As long as you continue to live in the house, having a reverse mortgage doesn't change who can live with you.

In general, inverted mortgage loans must be repaid when the borrower dies, and this is normally financed by the sale (or refinancing) of the property. This process can be a source of problems and distress for families who inherit a home. It's one of the reasons why reverse mortgages aren't recommended for older people who want to leave the property to their heirs. A traditional fixed-rate term mortgage may offer these heirs a financing solution to secure the property, but they may not qualify for such a loan.

In that case, a prized family home can be sold to a stranger to quickly satisfy reverse mortgage debt. If the house is sold for more than the outstanding loan balance, the remaining funds go to the heirs. If a house is sold for less, the heirs get nothing and insurance from the Federal Housing Administration (FHA) covers the lender's deficit. In other words, the reverse mortgage repayment amount cannot exceed the income from the sale of the property.

If the balance of a mortgage remains after the sale, the owners' assets are not responsible for that amount. So, you may not have a house to inherit, but you won't have a debt to pay either. Many problems are due to heirs not knowing that their parents or grandparents have a reverse mortgage. Prepare family members who don't apply for loans and who live in the house by deciding together what to do after they die, so they know what to expect.

Another major source of problems when inheriting a reverse mortgage is the tight schedule involved in doing so. No matter what your relationship is with the person who died, you'll need to act quickly to make sure you maintain control over what happens to your property. Heirs must obtain a home appraisal no later than 30 days after the due and payment notice is sent. If there is a surviving spouse who does not apply for a loan, you can apply for a deferment if the requirements described by HUD are met.

Communication is key to avoiding these problems. Prepare family members who don't apply for loans by deciding together what to do after they die, so they know what to expect. Department of Housing and Urban Development. Once the owner of a home with a reverse mortgage dies, the lender sends a letter to the heirs explaining that the loan is due.

The beneficiaries then have 30 days to decide how they want to proceed. This is why lenders suggest ending a strategy in advance. After the death of the last surviving borrower, the balance of the reverse mortgage loan matures and is payable. The profits from a reverse mortgage act as additional income for older people who may need to pay medical expenses or if they want to delay getting Social Security benefits.

If you're a reverse mortgage borrower, it's important that you have a plan to process your loan after you die. Before you apply for a reverse mortgage and take advantage of the equity in your home, be sure to explore all the options available. Heirs may be eligible to receive two three-month extensions to pay off the balance of their reverse mortgage, subject to HUD approval. Reverse mortgage borrowers are approved for a maximum loan amount or capital limit, but how you take out money and how quickly you earn interest under this program is entirely up to you.

The heirs who inherit the property must repay the outstanding balance of their reverse mortgage by refinancing it into their own traditional loan or by selling their house within 12 months. I constantly hear from heirs of inverted mortgage holders wondering what they should do now that their last borrower has died or had to move into assisted living. Reverse mortgages allow borrowers to enjoy their golden years without having to worry about their home loan. Within six months of their borrower's death, lenders can initiate foreclosure proceedings in order to pay off their loan if steps are not taken towards repayment of their reversed mortgage.

However, only way to prove if interest is deductible is by keeping records that show exactly how funds from your reverse mortgage were used. Lenders are happier when loans are repaid and don't have to get involved in foreclosure proceedings; however, since most reverse mortgages end with borrower's death, foreclosure at time of termination usually results when family members do not want or have means to repay loan or sell house.

Harry Lammel
Harry Lammel

Unapologetic lover of life. Award-winning family man. Typical husband and father. Music junkie. Food buff.