If you are the heir of a Home Equity Conversion Mortgage borrower who has passed away, you are not personally responsible for paying off the debt, but you are in a position to decide how the debt is paid.
You have several options and should select the one most advantageous for your situation.
Here are the options:
Sell the home and use the proceeds to repay the reverse mortgage balance. If the proceeds from the sale are less than the loan balance, Federal Housing Administration (FHA) insurance will cover the shortfall. Selling the home is usually how the debt is satisfied required to repay the reverse mortgage. If the proceeds are greater than the loan balance, the additional funds would go to you or the estate.
Keep the home by purchasing it with another source of funds. You are required to pay off the loan balance in full or at 95% of the home’s appraised value, whichever is less.
Deed the home to the lender through a process known as “deed in lieu of foreclosure.” By signing this document, you legally transfer title and thus ownership of the home to the lender.
Walk away from the home and allow the lender to foreclose. If the home is worth less than the loan amount, that is the lender’s responsibility and is one of the reasons why a borrower pays into a federal insurance fund.
The clock is ticking
Upon receiving a “due and payable” notice, which the lender sends to the borrower’s estate upon the owner’s death, heirs have 30 days to notify the lender whether they intend to buy the home, sell the home, or turn the home over the lender to satisfy the debt.1 Upon the death of the reverse mortgage borrower, a six-month clock also starts during which the loan balance must be repaid. The lender may also approve up to two 90-day extensions to repay the debt based on the estate or the heirs showing satisfactory documentation that they are actively trying to sell the home or repay the debt.2
As an heir of a reverse mortgage borrower’s estate, you will not be personally responsible for satisfying the loan balance. However, you will still have important decisions to make and duties to execute. It is important to act sooner rather than later within the given timetable because interest continues to accrue until the day the loan debt is satisfied, which could reduce the amount of money going to you or the estate. To find out if a reverse mortgage loan is right for you or your family, click here.
Are heirs responsible for satisfying the debt?
No. Although the debt must be satisfied for any heir to inherit the home or any of its value, heirs are not obligated to repay the debt and are not on the hook financially. However, to place themselves in a position to inherit the home or any remaining equity, heirs must choose one of the available options to satisfy the debt. A reverse mortgage is a non-recourse loan, which means that even if they choose to repay the debt and then buy, own, or sell the home, heirs are not required to pay more than 95% of the appraised value of the home.
What is the most popular form of repayment to enable inheritance?
Typically, heirs sell the home to pay off the reverse mortgage. If the home sells for more than the loan balance, the heirs keep the difference. If the sale of the home is less than the loan balance, FHA insurance makes up the shortfall.
What happens if the heir chooses to sell the home, but can’t sell it right away?
Typically, the heir has up to six months to sell the home. With HUD approval, the heir may be eligible for up to two 90-day extensions. In total, this could give the heir up to a full year from the death of the borrower to repay the loan balance or sell the home, provided all loan terms continue to be met, including home maintenance and payment of property taxes and homeowners insurance.
We hope this article has given you some help with things to think about. Of course, every situation is different. The information shared was verified at publication. This article is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.