Hi DG, my mother recently passed away, and I inherited her home which had a reverse mortgage on it. I have a few questions: (1) are the heirs, myself included, required to repay back the reverse mortgage? (2) If so, how long do we have to repay a reverse mortgage? And (3) what would we have to do if we wanted to keep the inherited reverse mortgage home in the family and allow one of the family members to live there?
-Heir to Home
Hey Heir to Home,
Dealing with an inherited home that has a reverse mortgage on it requires you to be informed and follow some special rules. It’s also a good idea to seek out professional help. While this blog is an excellent start, we recommend consulting with an attorney to fully learn about the options for your situation.
At the Dolinski Group, we are not attorneys but rather real estate agents that specialize in working with clients that have inherited homes through some legal means, like probate, quit claim deed, or a trust.
All that said, let’s answer your questions in sequential order and discuss some of the potential options you have for moving forward with the inherited home.
Will Heirs Have To Repay Back A Reverse Mortgage?
The answer is sort of.
Are you required to repay a reverse mortgage? Yes.
Do you have to pay back the full balance of the reverse mortgage? Maybe not.
A reverse mortgage becomes due AND payable when the last borrower on the loan is no longer living. In your case, the loan became due and payable upon the death of your mother.
Now it’s a question of how much responsibility you, as an heir, have for the reverse mortgage. That depends on a few factors.
Most reverse mortgages are a Home Equity Conversion Mortgage (HECM) and are backed by the Federal Housing Administration (FHA). Because of that fact, an heir is required to pay the full loan amount, but never more than 95 percent of the property’s appraised value.
In other words, you need to pay the full loan balance or 95 percent of the home’s appraised value, whichever is less.
How Much Do We Have To Pay Back On Reverse Mortgage?
So, there are only two situations that arise: either you will need to pay off the full loan amount or pay 95 percent of the appraised value, whichever is less.
In the case where 95 percent of a home’s appraisal value is greater than the mortgage balance, an heir is required to pay off the full balance of the reverse mortgage.
Where a home’s appraisal value is less than the mortgage balance, often referred to as being underwater, an heir is required to pay back 95 percent of the appraised value.
Even though the sale may not cover the balance due on the loan, the Federal Housing Administration (FHA) doesn’t allow lenders to come after borrowers or their heirs for the difference. The FHA covers the difference for you.
To understand the extent of your liability, it’s recommended that you consult with the lender and an attorney in the state of the deceased.
Let’s look at an example: if a home has an appraisal value of $200,000, while the mortgage balance is $275,000, an heir is responsible for 95 percent of the appraisal value. In our example, an heir is responsible for paying off $261,250.
Options for paying off a reverse mortgage are discussed further below in this article.
How Long Do Heirs Have To Repay A Reverse Mortgage?
The exact amount of time an heir has for repaying a reverse mortgage varies by lender and the term of the loans. However, we can provide you with a general timeline for getting a sense of when the payment may be due and your obligations during certain periods.
As an heir, you have to make a decision regarding the estate and can either repay the loan balance, sell the home, or deed the home to the lender to satisfy the obligation of the mortgage. If you inherited a property with siblings, you will need to come to an agreement if the Will does not specify.
An heir of a home with a reverse mortgage should contact the lender to formally discuss and understand repayment options.
First 30 Days
Lenders keep and search a database to track death certificates and become aware of the death of a borrower. In any case, there is a high probability that you’re required to notify the lender of the death. Seek out the help of an attorney to understand your obligations of reporting and notifying lenders.
In either case, the estate will receive a letter or notice that the reverse mortgage loan is due and payable. The notice will inform heirs of exact timelines, various terms, and their options for repayment.
With In 60 Days
The heirs of a home are required to get an appraisal of the home no later than 30 days after the due and payable notice is sent.
Ideally, an heir will have completed an appraisal within the first 30 days of death. A value of the home is needed for probate and tax purposes to determine the value of assets within an estate.
While a real estate agent can provide a similar service to an appraiser, the lender will most likely require you to have an appraisal done by a licensed and certified appraiser.
Before One Year
After the first 60 days, an heir must choose whether or not they want to sell the house to satisfy the loan or pursue an alternative option.
Keep in mind that a lender can start the foreclosure process after six months of the borrower passing away if no actions are taken to repay the reverse mortgage.
As an heir, you are eligible to receive two three-month extensions to pay the reverse mortgage balance. This isn’t guaranteed and requires HUD approval.
Heirs are typically given about twelve months from the time of death to repay the loan balance, sell the home, or provide the lender with the deed.
Keep An Inherited Home That Has A Reverse Mortgage
If an heir plans to keep the property, they will need to pay off the reverse mortgage loan. There are generally two ways that an heir can do this.
First, they could take out a new mortgage on the house after the death. To do this, an heir will need to be able to qualify for a traditional home loan. They will need to meet income and credit score requirements.
Second, you could pay off the balance with other proceeds or assets. If, in addition to home, you inherited money, you may be able to use that money to pay off the remaining balance of the reverse mortgage.
Remember: an heir is required to pay off the full balance or 95 percent of its appraised value, whichever is less.
It wasn’t asked, but I want to highlight your other options if you inherited a home with a reverse mortgage.
Can You Sell A Home With A Reverse Mortgage?
Absolutely. If keeping the home doesn’t seem like the best option, you can always list the home with a qualified Michigan real estate agent and sell the home.
You can use those proceeds to pay off the mortgage balance. When the home is worth more than the mortgage, the heir(s) can keep any remaining proceeds that don’t go to the mortgage and closing costs.
This is the most common situation that we experience. Of course, that’s because we are real estate agents in Michigan and cover areas, like Lansing, Detroit, and in between.
If the home is underwater, you can still sell the house to satisfy the loan. In this case, you will sell the home and be required to pay 95 percent of the appraised value. You won’t have any remaining funds or proceeds if you find yourself in this situation.
Just Walk Away
In the words of Kelly Clarkson, “just walk away”. If neither of these options work, you can provide a lender with a deed-in-lieu of foreclosure to satisfy the loan or let the home go into foreclosure.
A foreclosure on the home doesn’t negatively impact an heir’s credit as long as they are not on the loan.
It’s common for reverse mortgage borrowers to die with a balance that is higher than the value of the home. This situation is less common as the real estate prices have increased significantly over the last decade from 2012 until now.
When an underwater house is inherited, an heir may decide that the easiest option is to provide the lender with the deed instead of having to go through the time of selling it or the cost of foreclosure.
Get Expert Help
Be sure to use the expert help of an attorney to guide you through your options. From paying off the balance, to selling the home, to offering the deed, you have different options for settling the estate when you inherit a home with a reverse mortgage on it.
If you decide that selling your inherited home in Michigan is the right option for you, then we can help you get started. Get in touch with us to start a discussion about the home selling process and learn how much the home is worth.
How To Sell An Inherited Home In Michigan
Alternatively, you can watch our webinar on how to sell an inherited home.
