A reverse mortgage is a federally insured loan that provides homeowners with monthly cash payments based on the amount of equity they’ve built up in the property. While this can be a great tool for retirees who want an additional stream of income, it can spell trouble for whoever inherits the property after the death of the original owner.
Repayment Rules for Inherited Reverse Mortgages
Even though a reverse mortgage is a loan you’re taking on, you’re not required to repay it as long as you’re using the home as your primary residence. The only time that repayment in full is required is if you move out, sell the property in order to buy a new house or pass away leaving no surviving co-signer. If you’re married and your spouse still lives in the home, repayment can be deferred until their death.
So what does this mean for someone who inherits a home with a reverse mortgage? Essentially, the beneficiary would be on the hook for the full loan balance. It wouldn’t matter if they planned to live in the home or not. The lender would still expect them to pay off the reverse mortgage and any interest that’s capitalized over the life of the loan term.
Options Following the Inheritance of a Reverse Mortgage
When you’re left with a reverse mortgage obligation after a parent or loved one dies, you have four ways to deal with it. Here’s a breakdown of each:
Sell the Home and Use the Proceeds to Pay off the Mortgage
You can put the home on the market to pay off the loan. If the property’s value is higher than the loan balance, you’d get to use whatever is left over for other expenses. When the loan exceeds the home’s equity value, you’d only be responsible for paying what the house is actually worth.
Pay off the Mortgage on Your Own, If You Can Afford It
You can also pay off the loan so you can hang on to the home. Unless you inherited a large sum of cash along with the house, you’ll most likely have to finance the loan’s repayment.
In this scenario, you’d have to meet certain lending requirements as far as your credit, income and debts go to qualify for a new mortgage. That makes it all the more important to continually check your credit report and keep your finances in order.
Send the Deed Back to the Lender
A third option is to deed the property back to the lender. This is basically a way to avoid foreclosure. The lender becomes the owner of the property and heirs don’t bear any further financial responsibility for the home.
Ditch the Home Entirely
There are some advantages to giving the property back compared to the fourth option, which is simply walking away from the home altogether. If the lender forecloses and the home is sold at auction, the homeowner’s estate could still be held liable for the repayment of the loan debt.
Know Your Rights When Inheriting a Reverse Mortgage
If you find yourself holding the bag for a reverse mortgage, it’s important to remember that you have certain rights. For example, anytime a homeowner dies with a reverse mortgage in place, the lender must formally notify the heirs that the loan is due. Beneficiaries are given 30 days to figure out their next steps.
Once you’ve decided to sell or pay off the loan, you’ll have an additional six months to complete the transaction. In some instances, you may be able to get a six-month extension to finalize the deal. Being aware of the rules that are in place can keep you from making poor decisions when trying to resolve the issue with your reverse mortgage.
Whenever you inherit a major sum of money or property, it can be difficult to know how to manage things. This is especially true if the asset you’re inheriting has something as massive as a reverse mortgage still attached to it. However, with some education and smart decision-making, you’ll be able to take care of the situation in a way that’s best for you and your family.
Financial Planning Tips for Future Homeowners
- Do you have questions about how a home purchase could affect your long-term financial plan? A financial advisor can help with this. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Be sure to do significant research into what you can actually afford prior to making any down payments on a home. SmartAsset’s home affordability calculator is a great place to start.
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