Reverse Mortgage Problems for Heirs: What You Need to Know

As an heir to a loved one who took out a reverse mortgage, you may be facing a complex and potentially overwhelming situation. Inheritance of a home with a reverse mortgage can be a nightmare, especially if you're not prepared.

The lender will typically take priority over other creditors, including the heirs, when it comes to claiming the home. This means that if the borrower passes away or is unable to pay the loan, the lender will be the first to get paid.

You may be left with a significant debt to pay off, which can be a heavy burden. The amount of debt can be substantial, often in the tens of thousands of dollars.

Heirs may also face foreclosure, which can be a stressful and emotional experience. The lender will take possession of the home and sell it to pay off the loan, leaving the heirs with nothing.

Inheriting a home with a reverse mortgage can be a complicated and stressful experience. You usually have up to 12 months to repay the reverse mortgage if you want to keep the property, but this can be a daunting task depending on the amount and your savings.

Repaying the loan is just one of the common reverse mortgage problems for heirs. Lower inheritance amounts are also a concern, as the heir's cash inheritance may be reduced if their loved one used a reverse mortgage to get cash out of their home. If the heir sells the home for more than the remaining loan balance, they will pocket any money left over from the sale, which may be less than they were supposed to inherit.

Here are some of the common reverse mortgage problems for heirs:

A reverse mortgage can be costly, especially when it comes to upfront fees. The lender deducts an upfront fee, which can be substantial, as seen in the example of a couple who had to pay $25,551 upfront for fees and costs.

Reverse mortgage interest rates are usually higher than conventional mortgage interest rates, but similar to rates on home equity loans. The couple in the example had a 7.5% annual adjusting interest rate.

The debt can grow significantly over time, as seen in the example where the couple's debt grew to around $765,000 after 15 years. This means that the heirs would need to pay this debt after selling the home.

A reverse mortgage is meant for someone who doesn’t have cash flow, according to Derek Miser, president of Miser Wealth Partners in Knoxville, Tenn. This highlights the importance of considering alternative options, such as home equity loans.

If you inherit a home with a reverse mortgage, you'll need to know the rules and deadlines. A reverse mortgage can be a good way for people age 62 and older to get cash out of their home, but it comes with a strict set of rules and deadlines.

You should expect that less equity will be left for you and other heirs if a reverse mortgage is involved. Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are backed by the Federal Housing Administration (FHA).

You can sell the home, pay off the loan, or give the lender a deed in lieu of foreclosure if you inherit a home with a reverse mortgage. Most reverse mortgages come due 30 days after the borrower's death.

Here are the common reverse mortgage problems for heirs:

You'll receive less money than you may have anticipated if your parent or relative didn't tell you they obtained a reverse mortgage, as it reduces the size of the borrower's estate.

If there are multiple heirs, they'll have to decide as a group whether to buy, sell, or surrender the home, and problems could develop if the heirs disagree on what to do with the home.

The entire balance of a reverse mortgage comes due upon the death of the borrower and any "eligible non-borrowing spouse", and heirs will receive a due and payable notice from the lender indicating the full balance of the reverse mortgage that must be paid.

Other family members are not protected from losing the home if you take out a reverse mortgage. If you die or move out, the loan will be due and your family members will be responsible for paying it back. This can be a significant risk, as they could lose the home if they can't cover the debt. In fact, the government strengthened spousal protections for reverse mortgages in 2014, but these protections don't extend to other family members. They can remain in the home for the rest of their lives, but other family members are not so lucky. If they can't cover the debt, they could lose the home, which is a worrying thought.

Inheriting a property with a reverse mortgage can be a complex and stressful experience, but understanding the facts can help you navigate the situation.

The entire balance of the reverse mortgage comes due upon the death of the borrower, which can create problems for heirs who inherit the property. This is because the lender will issue a due and payable notice, indicating the full balance of the reverse mortgage that must be paid.

You aren't automatically responsible for reverse mortgage debt just because you're an heir. However, you will lose the property if you can't cover the loan amount or don't want to pay it back. The lender can write off the loan, but you'll still be left with nothing.

If the homeowner dies and the loan's remaining balance exceeds the property's value, the heir(s) isn't obligated to pay the difference. However, if they can't cover the loan amount or don't want to, the lender can write off the loan, and you'll lose the property.

The heirs can then decide to keep the home and make monthly mortgage payments, or they can sell the home to repay the loan and keep any remaining equity. If the loan balance is lower than the property's value, the heirs have more options.

You can pay off your line of credit or reverse mortgage balance during your lifetime to keep your heirs from facing reverse mortgage problems after your death. This way, you can still make use of the equity in your home when you need it, but by paying down the balance over time, you keep your heirs from facing financial burdens.

If the homeowner dies and leaves behind a surviving spouse, the spouse is usually protected by the terms of the loan. They can remain in the home and continue to receive loan payments from the lender.

The "reverse" in reverse mortgages is a key concept here - instead of the borrower paying the lender, the lender pays the borrower from their converted equity. This means the surviving spouse can keep receiving mortgage payouts as long as they live in the home.

In most cases, the surviving spouse can stay in the home even if they're not a co-borrower, thanks to HUD's reforms on reverse mortgages. This applies if the reverse mortgage originated on or after August 4, 2014.

However, if the couple was married when they took out the reverse mortgage but got divorced and one of them remarried, the new spouse would not have the right to stay in the home.

Here are some general rules around reverse mortgages and spouses or co-borrowers:

You can transfer a property with a reverse mortgage into a living revocable trust to take the burden off your family. This way, your trustee will use other assets in your estate to settle the mortgage lender’s claims and resolve the debt.

Heirs who receive properties encumbered with reverse mortgages have 30 days to decide what to do. They can choose to pay off the mortgage, sell the property, or let the lender foreclose on it.

If you transfer a property into a trust, your heirs won't have to worry about paying off the reverse mortgage balance. Instead, they can focus on inheriting the property itself.

Heirs have a 30-day window to decide whether to pay off the reverse mortgage, sell the property, or let the lender take it over.

Estate Planning can provide a sense of security for your loved ones.

You can set aside funds within your estate to pay off a reverse mortgage, which is a common concern for heirs.

Property owners can include a directive in their Will to pay off the reverse mortgage using earmarked funds or their residual estate.

This will clear the title passed to your heirs and prevent the bank from coming after them to collect the debt.

It's essential to address this issue in your estate planning to avoid any potential problems for your heirs.