Understanding the Responsibilities and Options for Inheriting a Home with a Reverse Mortgage

Managing the Challenges of Inheriting a Home with a Reverse Mortgage

What Happens to a Property in Probate with a Reverse Mortgage?

Managing a property in probate is already complex, but it can become even more challenging when a reverse mortgage is involved. Here’s what you need to know if you’ve inherited a home with a reverse mortgage.

Understanding Reverse Mortgages

A reverse mortgage is a type of home equity loan that allows older homeowners to convert some of their home’s equity into cash. Payments are made to the homeowner, decreasing their equity while increasing the loan balance. The property secures these loans, and the borrower must maintain the home, pay property taxes, and keep the property insured.

The loan becomes due and payable when the last surviving borrower passes away, but the property does not automatically revert to the lender. Heirs have several options to address the loan.

Options for Heirs

If you’ve inherited a home with a reverse mortgage, you typically have four choices:

1. Pay Off the Loan

If the property’s value exceeds the loan balance, heirs can pay off the loan to keep the home. This may involve refinancing or using personal funds. Heirs usually pay either the loan balance or 95% of the home’s current appraised value, whichever is less. You will be able to determine the amount that is owed by reviewing the most recent mortgage statement.

2. Sell the Property

Selling the home is a common solution. Heirs must transfer the title to their names (or the name of the estate) before the sale. Reverse mortgages are non-recourse loans, meaning heirs are not responsible for any shortfall if the sale doesn’t cover the full loan balance—an insurance policy (provided by HUD at the time of loan origination HUD) typically covers the difference. However, the sale must be an arms-length transaction to an unrelated party.

3. Deed in Lieu of Foreclosure

If heirs don’t want the home, they can work with the lender to transfer ownership through a deed in lieu of foreclosure. This avoids the lengthy foreclosure process and allows heirs to relinquish the property quickly.

4. Do Nothing

If no action is taken, the lender will foreclose on the home. While foreclosure is a last resort, it’s important to communicate with the lender to explore other options.

Timeline and Communication

After the borrower’s death, lenders usually notify heirs and provide a 30-day window to decide on a course of action. Extensions may be granted, especially if heirs show good faith efforts to sell, refinance, or resolve probate issues. Foreclosure proceedings typically take 5-6 months, depending on state laws.

Consulting Professionals

Dealing with a reverse mortgage in probate requires careful consideration. Consulting with probate attorneys, real estate professionals, and financial advisors can help you navigate your options and make informed decisions.

Final Thoughts

Managing a property with a reverse mortgage during probate can be challenging, but with the right guidance and proactive communication, it’s possible to handle the process smoothly. As Phoenix-based probate real estate experts, we are here to help you evaluate your options and guide you through the complexities of selling or managing an inherited property. Contact us to learn more about how we can assist during this difficult time.