When TV shows talk about heirs and inheritance, they tell the audience that the main character will receive $$$$, which just so happens to be enough to begin their start-up company. Unfortunately, life isn’t always so rosy.
We do have some good news, though. As the heir to a reverse mortgage debt, you are not responsible for paying off the debt. However, this doesn’t mean you have no responsibilities whatsoever.
Before we can explain your new role, we should first make sure that you understand what a reverse mortgage is.
Reverse mortgages are a type of loan. They are given to homeowners over 62. The homeowner asks the lender to provide them with money comparable to their home’s value.
This money could be a lump sum, a fixed monthly payment (like a wage), or a line of credit that they can dip into.
The homeowner doesn’t pay towards the loan; it simply grows or stays at one figure. This is where you come in. Unfortunately, nothing comes for free, and the loan needs to be paid off at some point.
When the homeowner dies, moves away permanently, or sells their home, the entire loan balance needs to be paid to the lender. Typically, selling the house will cover the loan, hence the name “Reverse Mortgage.”
Although selling the home is the most common option, there are four that you can pick from as the heir to the debt.
Selling The Home To Pay Off The Reverse Mortgage Debt
If the house value has gone down, you might worry that selling the home will not pay off the full debt, however, the Federal Housing Administration has prepared for this shortfall.
The idea behind reverse mortgages is to keep houses in circulation instead of being hoarded by families over time. This is why selling the home to pay off the debt is the expected process to follow.
If the home’s value is less than the reverse mortgage, then FHA will cover the shortfall, satisfying the debt to the lender.
If the home’s value is worth more than the reverse mortgage, as the heir, you will receive the difference once the debt has been paid.
Keeping A Home With A Reverse Mortgage Debt
If you decide to keep the deceased’s home, you are permitted to do so as long as you pay off at least 95% of the loan. The Federal Housing Administration will pay the remaining 5% to satisfy the debt.
Giving The Home To The Lender To Pay Off Mortgage Debt
You may find that no one wants to buy the home in question. If this happens, you can opt to give the deeds of the property to the lender. Doing this means you will not receive the difference in value if the home is now worth more than the original debt.
The process is called “deed in lieu of foreclosure.” You will be given a document to sign that legally transfers the home’s title and ownership away from you (the heir) and towards the lender.
Doing Nothing To Pay Off A Reverse Mortgage Debt
The last option is to do nothing. You can walk away from the home and allow the lender to foreclose the home. Doing this means you may not receive the difference in property value if the property sold for more than the loan was worth.
If dealing with the debt is too much in your time of mourning, this option is available to you.
In short, the answer is no; heirs do not have to pay off a reverse mortgage debt. However, the debt does have to be satisfied if the heir wants to inherit the property or to inherit the payment difference in current value to loan amount.
If the debt was worth $100,000 and the home is now worth $300,000, it would be in the heir’s best interest to help satisfy the debt so they can receive the $200,000 difference if they choose to sell the property.
Helping to satisfy the debt doesn’t mean paying for the debt, although that is an option. Instead, you can help sell the home or hand the deeds over to the lender.
When you receive a “due and payable” notice from the lender, you will have 30 days to notify the lender about which course of action you want to take. When you have made your statement, you will have up to six months to satisfy the debt.
If the six months have passed and the lender has seen no evidence that you are attempting to satisfy the debt, then they can start foreclosure proceedings. This means they will take ownership of the property and can deal with the debt how they please.
If you show evidence that you are attempting to satisfy the debt, but circumstances are slowing down the process, you may be given a two or three-month extension.
During this time, the debt may accrue interest, and although the Federal Housing Administration will pay towards the debt if the interest grows larger than the property value, this means that the interest can cut into your inheritance. Because of this, it is best to sell the property as soon as possible.