Selling a House with a Reverse Mortgage
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If you have an older family member who has recently passed, it is, no doubt, difficult emotionally. But on top of mourning, you may also have to handle and settle your loved one's financial matters. If they had a reverse mortgage, that could make things more complicated. So, what happens when someone with a reverse mortgage dies? We've compiled the information below on what you need to know if your deceased family member had a reverse mortgage.
What is a reverse mortgage?
A reverse mortgage is a loan option available to seniors aged 62 and older whose homes are worth more than the amount they owe on their mortgage. Instead of continuing to pay off their mortgage, the homeowner receives payments from their lender drawn their home's equity — either as a one-time lump sum payment, monthly installments or through a line of credit.
This money received is considered to be a loan and is therefore not a taxable source of income. Over time, interest on the mortgage increases, and the home's equity decreases, while the homeowner can continue living in their home.
Reverse mortgages come in three types:
A single-purpose reverse mortgage is the least expensive type of loan. As the name implies, the homeowner who takes this loan from their lender agrees to use their income from their reverse mortgage for one predetermined purpose, such as home repairs or property taxes.
A Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage. A HECM is provided by the U.S. Department of Housing and Urban Development and can be taken out by any qualifying age homeowner, regardless of income or medical conditions. The money received can be used for any purpose. The loan amount and payments received depend on various factors, including age, amount home equity, and interest rates.
More expensive homes may qualify a homeowner for a proprietary reverse mortgage. This type of loan is not federally funded, so the regulations involved are comparatively less strict. Like HECMs, proprietary reverse mortgages do not require homeowners to spend their reverse mortgage income on any particular expense.
How does a reverse mortgage differ from a regular mortgage?
Unlike a regular mortgage, a reverse mortgage does not require the homeowner to make monthly payments. However, they still need to live in the home, pay property taxes and homeowner's insurance, and keep the property in good condition.
In the case of a married couple co-borrowing a reverse mortgage, only one spouse needs to meet the reverse mortgage requirements. The loan will need to be paid back with accrued interest when the homeowner no longer resides in the house as their primary residence, whether it is due to their passing or relocation to a care facility. Whoever inherits the home is responsible for paying this amount back in full.
How does a reverse mortgage work when the mortgage holder dies or enters a long-term care facility?
So, what happens to a reverse mortgage when the owner dies? When the holder of a reverse mortgage is no longer living at the property, the responsibility of paying off the loan falls to their heirs.
If you inherit a house with a reverse mortgage, you have 30 days to pick one of the following options:
- Sell the house: This is the method most heirs choose to pay off a reverse mortgage. As long as the house is sold for 95% of its appraised value, the loan is considered paid off, even if the profit is less than the balance owed. If you are fortunate enough to sell the house for a value higher than the loan, you can pocket the difference.
- Providing a deed in lieu of foreclosure: If the house appraises to be worth less than the remaining balance on the reverse mortgage, it might be easiest to give the property to the lender to do with it as they please.
- Keeping the house for yourself: If you want your loved one's home to stay in the family, you can take out a new mortgage to pay off the original reverse mortgage balance.
- Renting out the property: If you wish to remain the homeowner while allowing renters to reside in it, you can refinance to a forward mortgage.
How soon do I need to contact the reverse mortgage company?
Unfortunately, time is of the essence when it comes to dealing with a reverse mortgage, even though you already have a lot on your plate. No more than 30 days after the homeowner's passing, you will need to inform the lender that they no longer reside at the property.
Thirty days after the lender is notified of the mortgage holder's death, they will send you a due and payable notice and a letter informing you of your options for closing the loan. You must then respond stating what you intend to do with the property 30 days after receiving these documents, which is 60 days after first notifying the lender.
How soon can the reverse mortgage company begin foreclosure proceedings?
Six months after the homeowner passes away, the mortgage company has the right to begin foreclosure proceedings if the loan has not been paid off (unless a non-borrowing spouse of the homeowner has been granted a deferral period, in which case the foreclosure process can begin as soon as six months after the deferral period ends).
You may request up to two three-month extensions, during which the mortgage company will ask to see proof that you are making an effort to sell the house. The use of these extensions could leave you with a total period of up to one year to settle the loan.
Can you sell a house with a reverse mortgage?
Once the mortgage company has informed you of the balance due on your loved one's home, you are free to decide on a price that will pay off the loan and list the house for sale.
Choosing an appropriate listing price can be difficult. AMI can help you figure out how much your property is worth to ensure that you meet the reverse mortgage conditions and maybe even earn some additional proceeds. Simply send us your information, and we'll provide you with a free, no-commitment cash offer.
How should I deal with a reverse mortgage when the owner dies?
If you're the heir to a reverse mortgage taken out by someone who has recently passed, here are the steps you'll need to take in dealing with a reverse mortgage when the owner dies:
- Take a deep breath. You have a full month before you need to deal with your newly inherited property. Take some time to grieve before overwhelming yourself with reverse mortgage proceedings.
- Contact the mortgage company. Within 30 days, you must send the lender a death notification with the name and account number of the deceased, the date of their passing, and an attached death certificate, stating that you are the heir to their estate and wish to know the remaining balance on the reverse mortgage.
- Decide what to do with the home. Once you know how much you owe the lender, decide what payment method makes you and your family the most sense. Figure out whether you want to keep the home or not.
- Inform the lender of your decision. 30 days after the mortgage company provides you with the due and payable notice for the loan, respond to them stating how you intend to pay off the balance.
- Close the loan on time. Make sure to settle the debt within six months of your loved one's passing or ask for extensions if you need more time to sell the house. Failure to meet the necessary deadline can lead to foreclosure.
If you are in the majority of reverse mortgage heirs who decide to sell their property, you surely want the process to be as quick and painless as possible. At AMI, we know how stressful it is to sell a home when you're already coping with the loss of a loved one. Let us take some of the burdens off of your shoulders and contact us if you'd like to sell the home quickly to receive a free, no-obligation cash offer.