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Inheriting a loved one’s home with a reverse mortgage attached can create problems for heirs. They may face calls, collections efforts, and even foreclosure on their newly-inherited property. Find out the options to resolve reverse mortgage problems for heirs, and how you can prevent your loved ones from taking on your debt after you die.
A reverse mortgage is a secured loan against a home or other real property you own. Also called a “Home Equity Conversion Mortgage” (HECM), they allow older homeowners to make use of the equity in their home. There are no monthly mortgage payments, but as you receive more money from the bank, the balance of your reverse mortgage grows and accumulates interest as long as it remains unpaid. You can pay down that balance at any time. If you don’t, it becomes due and owing when you sell or permanently move out of your home.
Whether a property owner borrowed $1,000 for home repairs or $30,000 for medical bills, the entire balance comes due upon the death of the borrower and any “eligible non-borrowing spouse.” When the last title owner dies, the heirs to that property will receive a due and payable notice from the lender which indicates the full balance of the reverse mortgage that must be paid. Practically speaking, this notice will likely be issued after the Notice to Creditors is published by the estate’s personal representative, or when someone in your family notifies the bank that the property owner has died.
A reverse mortgage can create problems for heirs who inherit the property. This is because the entire balance comes due at once. The U.S. Department of Housing and Urban Development (HUD) guidelines for HECMs says that lenders should attempt to resolve the loan within 6 months of the borrower’s death.
This timing can be a problem if there are delays in the Florida probate process. Often, heirs will need to work with the personal representative and the lenders while probate is still ongoing if they want to keep the home. Failing to promptly address a reverse mortgage can mean the property will face foreclosure before the heirs have an opportunity to sell it for full value, or obtain financing to pay off the debt. However, heirs who are actively working to resolve the debt (by listing the property for sale or seeking financing) can request up to two 90-day extensions with HUD approval, even while the foreclosure proceedings are ongoing.
In addition, until the reverse mortgage is paid, it will cause the property to have a “clouded title.” This will make it harder to sell the property because the buyer and title company will need assurances that the debt will be settled at the time of closing.
If you are the property owner considering a reverse mortgage, you have options to avoid passing your debts to the next generation.
You can pay off your line of credit or reverse mortgage balance during your lifetime. You can still make use of the equity in your home when you need it, but by paying down the balance over time, you keep your heirs from facing reverse mortgage problems after your death.
Property owners can also set aside funds within their estate. Generally, mortgages do not need to be paid off as part of a person’s estate. However, your Will can direct your executor to pay off the reverse mortgage as part of the estate administration process using earmarked funds, or your residual estate. This will clear the title passed to your heirs and prevent the bank from coming after them to collect the debt.
If you are updating your estate planning, you may transfer a property with a reverse mortgage into a living revocable trust. This will take the burden of paying the balance off your family. Instead, it will be up to your trustee to use other assets in your estate to settle the mortgage lender’s claims and resolve the debt.
Heirs who receive properties encumbered with reverse mortgages have choices of their own. Generally, heirs will have 30 days after receiving the due and payable notice from the lender to decide whether to:
Heirs can choose to assume the reverse mortgage and pay it off. You may be able to refinance using a traditional mortgage and pay off the reverse mortgage that way. This will depend on the equitable value of the property, the balance of the reverse mortgage, and your personal credit history.
You may not need or want to maintain the house you inherited. In that case, your best option may be to sell the inherited property and use the proceeds of the sale to satisfy the reverse mortgage. You will be entitled to any net equity in the property, which could result in a substantial capital gain and related taxes, so be certain you discuss the tax implications with the estate administration attorney or an accountant before taking this option.
If the home has lost value, the balance of the reverse mortgage is especially high, or you cannot afford other options, you may simply need to walk away from the property. Under federal law, heirs who inherit property with reverse mortgages are only liable for the smaller of the full loan balance or 95% of the home’s appraised value, whichever is less. By surrendering the property to the lender or allowing foreclosure proceedings to take place, you can satisfy the debt and resolve any collection efforts against you. This means walking away from a reverse mortgage problem is sometimes the best way to avoid paying your loved one’s debts.
When a loved one dies owning a house with a reverse mortgage, it starts a countdown to problems for heirs. That is why it is important to start working with an experienced estate administration attorney right away, who can help you decide whether to keep, refinance, or sell the property. At Harrison Estate Law, P.A., our estate and probate team can help consider your options to satisfy the debt and help heirs get the most benefit from their inheritance. Contact us here or call 352-559-9828 to get help today.
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