A reverse mortgage enables homeowners aged 62 and above to access cash by leveraging their home equity. This financial product, known as a Home Equity Conversion Mortgage (HECM), permits these individuals to tap into their home’s value, offering the option to receive the funds as a one-time payment, regular monthly installments, or through a credit line.
Upon the death of the borrower, the outstanding loan amount must be paid. Heirs who receive a property with a reverse mortgage typically have a month to either purchase the property, sell it, or surrender it to the lender. That said, this timeframe is frequently extendable up to six months, giving heirs additional time to obtain financing or purchase the home.
Spouse or Co-Borrower
Beneficiaries may receive a property that has a reverse mortgage; however, they must address the outstanding debt. This can be done by either paying off the loan, selling the property, or surrendering it to the lender. When it comes to inheriting a property with a reverse mortgage from a partner, the guidelines are influenced by various aspects.
Co-borrower: A co-borrower is allowed to stay in the residence and receive payments from the reverse mortgage. If not, the loan amount needs to be settled within 30 days, and there’s an option for a six-month extension.
Timeline: Certain people might still meet the criteria for being an eligible non-borrowing spouse according to the regulations set by the U.S. Department of Housing and Urban Development (HUD). Although qualifying can pose challenges, heirs can retain ownership of the house without settling the outstanding debt. This procedure tends to be most effective if the reverse mortgage was obtained on or after August 4, 2014.
Married Spouse: If a spouse secured a reverse mortgage post-August 4, 2014, the surviving spouse will be recognized as an eligible non-borrowing spouse, allowing them to remain in the residence without needing to repay the reverse mortgage loan.
What Happens If the Home Sells for Less than the Reverse Mortgage Owed?
Should the property be sold for an amount that falls short of the debt, the heir will not obtain any cash proceeds from the transaction. A property might fetch a price lower than the existing reverse mortgage due to declining home values, physical decay, damage, or if the borrower has surpassed their expected lifespan. Heirs are not liable for settling any remaining debt once the home sale proceeds are factored in.
Rather, the shortfall of the lender is covered by insurance provided by the Federal Housing Administration (FHA).
Can a Family Member Take Over a Reverse Mortgage?
What Happens If a Homeowner With a Reverse Mortgage Goes Into a Nursing Home?
Reverse mortgages come with specific residency stipulations. Should you reside in a nursing facility for an extended time, the reverse mortgage will need to be settled, potentially leading to the sale of your house, which could result in disqualification from receiving government assistance due to the gained funds from the sale.
The Bottom Line
Inheriting a reverse mortgage can present various challenges for heirs. The method of inheriting a property tied to a reverse mortgage hinges on the heir’s relationship to the original loan, whether they are a spouse or co-borrower, and the date the loan was established.