Losing an elderly family member is never easy, and it can be especially challenging to deal with their financial affairs while you’re still grieving. This can become even more complicated if they had a reverse mortgage. If you find yourself in this situation, you might be wondering what happens next. To help you navigate this process, we’ve put together some important information about what to do if your loved one had a reverse mortgage and has passed away.
What is a reverse mortgage?
It’s a type of loan available to seniors aged 62 and older who own a home that’s worth more than what they owe on their mortgage. Instead of making payments on their mortgage, the homeowner receives payments from their lender based on the equity of their home. They can choose to receive this money as a lump sum, monthly payments, or through a line of credit.
The best part? This money isn’t considered taxable income since it’s a loan, not an earned wage. Over time, the interest on the loan adds up, reducing the home’s equity, but the homeowner can continue living in their home.
There are three different types of reverse mortgages available:
- A single-purpose reverse mortgage is the most affordable option. The homeowner agrees to use the loan for one specific purpose, such as home repairs or property taxes.
- A Home Equity Conversion Mortgage (HECM) is the most popular reverse mortgage option. The U.S. Department of Housing and Urban Development provides it, and it’s available to any qualifying homeowner, regardless of income or medical conditions. The homeowner can use the loan for any purpose, and the amount they receive depends on factors like their age, equity in their home, and interest rates.
- Proprietary reverse mortgages are available for homeowners with more expensive homes. Since these loans aren’t federally funded, the regulations are less strict. Homeowners aren’t required to spend the loan on any particular expense.
So, how is a reverse mortgage different from a regular mortgage?
With a reverse mortgage, the homeowner doesn’t need to make monthly payments. However, they still need to live in the home, pay property taxes and homeowner’s insurance, and maintain the property. If a married couple co-borrows a reverse mortgage, only one spouse needs to meet the loan requirements. The loan must be repaid with accrued interest when the homeowner no longer lives in the house as their primary residence, whether it’s due to their passing or moving to a care facility. Whoever inherits the home is responsible for paying back the loan in full.
How does a reverse mortgage work after the mortgage holder’s death or move to long-term care?
When the holder of a reverse mortgage is no longer living at the property, such as in the event of their passing or move to a long-term care facility, the responsibility of paying off the loan falls to their heirs. If you inherit a house with a reverse mortgage, you have 30 days to choose one of the following options:
- Sell the house: This is the most common method heirs use to pay off a reverse mortgage. As long as the house sells for at least 95% of its appraised value, the loan is considered paid off, even if the profit is less than the balance owed. If the house sells for more than the loan balance, you can keep the difference.
- Provide a deed in lieu of foreclosure: If the house appraises for less than the remaining loan balance, giving the property to the lender to dispose of may be the easiest option.
- Keep the house: If you want to keep the property in the family, you can take out a new mortgage to pay off the reverse mortgage balance.
- Rent out the property: If you prefer to keep the house while renting it out, you can refinance to a forward mortgage.
What is the timeline for notifying the reverse mortgage company?
It is essential to notify the lender that the mortgage holder is no longer living at the property within 30 days of their passing. The lender will then send you a due and payable notice and a letter with options for closing the loan 30 days after being notified. You must respond with your plans for the property 60 days after receiving these documents.
If the loan has not been paid off, the mortgage company can begin foreclosure proceedings six months after the mortgage holder’s death. You may request up to two three-month extensions, during which you must show proof of making an effort to sell the house. This leaves you with a total period of up to one year to settle the loan.
Once the mortgage company informs you of the balance due, you are free to choose an appropriate listing price and sell the property to pay off the loan. ACF can assist you in determining the property’s value and provide a no-commitment cash offer.
How to handle a reverse mortgage after the homeowner’s death?
If you’ve inherited a reverse mortgage after the passing of the homeowner, follow these steps to handle the situation:
- Take a moment. You have a month to address the matter, so take some time to grieve and gather your thoughts before you deal with the reverse mortgage.
- Contact the lender. Within 30 days of the homeowner’s passing, notify the reverse mortgage company with the deceased’s name and account number, the date of death, and a death certificate proving you are the estate’s heir. Ask for the remaining loan balance.
- Decide on the property’s fate. Once you know how much you owe the lender, consider your options: keep the property, sell it, provide a deed in lieu of foreclosure, or refinance with a forward mortgage.
- Inform the lender of your decision. After 30 days of receiving a due and payable notice, reply with your plan for paying off the balance.
- Close the loan promptly. You have six months from the homeowner’s passing to settle the debt, or you can ask for up to two three-month extensions. Failure to pay could lead to foreclosure.
Selling A House With A Reverse Mortgage
If you’re among the majority of heirs who choose to sell the property, you’ll want to do so as smoothly and quickly as possible. At ACF, we understand the difficulty of selling a home while grieving. Contact us for a free, no-obligation cash offer to sell the property fast and hassle free.