I often get asked what happens when a home that you are supposed to inherit has a reverse mortgage on it.
First, understand that a reverse mortgage is like any other mortgage in that there is money owed and if it is not paid the lender can and will foreclose. But there are significant differences.
You Can't Just Keep Paying the Loan
Trying to save a home from foreclosure by a reverse mortgage lender is harder than trying to save a home from foreclosure of a normal, non-reverse mortgage. This is because residential (non-reverse) mortgage lenders are not allowed to call the loan due when the borrower dies if the property is being inherited by a family member. All you have to do is keep paying the monthly payments.
With a reverse mortgage, you can't just keep making the mortgage payments in order to save the home. This is because with a reverse mortgage there are no monthly mortgage payments. In fact, it was the opposite. The lender was making monthly payments to the borrower until the borrower died. When the last of the borrowers dies, those payments stop and the loan is due and payable in full. Accordingly, you need to contact the lender and stay in touch if you want to do anything other than walk away and let the lender foreclose. Once the lender determines who the heirs are (you can help this along by informing the lender), the lender or loan servicer will send you a letter explaining your options and asking you to choose.
If You Want to Keep the Home
If you want to keep the home, you must pay off the loan. You can either pay cash or find another lender to refinance the loan or sell the home. You do not have unlimited time to refinance, however, and you will not be able to refinance until the home is in your name, so it is important to get started with the process of retitling the home in your name (called probate) as quickly as possible. Some (rare) lenders are willing to lend to the executor of an estate, but, again, you have to get the probate process started in order to get someone appointed as executor.
If the Home is Worth Less than the Loan
It is common for the home to be worth less than the outstanding balance of the loan. The wonderful thing about reverse mortgages, however, is that the amount you need to pay to save the home is the LESSER of the loan balance or 95% of the home's appraised value. HECM's are “non-recourse” loans. Also, if the value of the home is less than the loan balance, you are not responsible for the difference.
If You Decide to Sell the Home
Within 30 days of notification, the lender will send an FHA appraiser to determine the home's current market value. It must be listed at the appraised value or greater. You have 60 days to sell the home or forfeit without penalty. You can request two 90-day extensions with the lender and another two 90-day extensions with FHA. To receive the full 12 months (1 year) extension you must prove that you are actively trying to sell the house, such as providing a listing document or sales contract.
If it sells for less than the loan balance, all of the net sales proceeds go to the lender. FHA Mortgage Insurance picks up the difference on reverse mortgage loans that are "underwater".
If you want to sell the home, you need to get started with the process of retitling the home in your name (called probate) as quickly as possible. Until an executor is appointed by the probate court, nobody has the authority to sell the home. Once an executor is appointed by the probate court, the executor can sell the home, but this sometimes requires further court approval, so time is of the essence in these situations.
If You Don't Want the Home
If you don't want the home, you have a couple options. First, you could sell, as discussed above. If there is no potential equity, however, you may decide it is not worth the effort, in which case you can just walk away and let the lender foreclose or turn in the keys to the lender and sign a “Deed in lieu of foreclosure,” in which you forfeit forfeit any potential remaining equity. Either way you will not be liable for any deficiency.
If you are trying to juggle saving a home with a reserve mortgage while trying to get it retitled in your name, we can help. Call our Crossville, Tennessee office at 931-250-8585 to schedule an appointment.