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If you’ve recently inherited a home with a reverse mortgage and aren’t sure how to proceed, it isn’t as daunting as you may think. Knowing exactly what you’re facing will make the process much easier.
A reverse mortgage allows anyone over 62 to tap their home equity. This is usually a backed Home Equity Conversion Mortgage but is also known as a reverse mortgage. With this, the homeowner doesn’t make payments on the mortgage when they’re living in the house, and so the outstanding balance is due when the borrower passes away.
If the HECM is taken out as a joint application between a couple, it doesn’t have to be paid if one half of the couple passes away, only when the remaining partner has also died.
As the heir of the property, you will be given 6 months from the date of the remaining partner’s death to pay off the reverse mortgage, but it’s recommended that you deal with is as quickly as you can if possible. This is because the interest on the balance and the monthly insurance premiums will diminish any remaining equity in the house until the loan is fully settled.
One of the bonuses of reverse mortgages is that they are ‘nonrecourse’ loans. This essentially means that if the loan amount is exceeding the value of the house, the lender is unable to go after the rest of the estate or any of the heir’s other assets to fulfill the payment.
The heirs of the property also cannot owe more than half of the value of the property, making it easier to source the funds for the reverse mortgage and normally allowing for an easier sell.
Any difference is covered by federal mortgage insurance, which is paid for whilst the borrowers are holding the HECM. In this instance, any remaining equity after the loan is paid off will go to the estate.
When the last borrower of the property passes away, the executor for the estate will need to contact the lender to let them know of the death. This will stop the monthly payments, and if the borrower had a line of credit, the lender will close this. Within 30 days of being notified, the lender will send a federally approved appraiser to you, the heir, to confirm what amount is due to the lender. There are two options that they work from to determine the final amount;
Either the lesser of the reverse mortgage
Or 95% of the appraised market value
What does this mean?
If the house is worth £200,000, and the loan balance is £100,000, to buy the house the heir will need to pay off the £100,000. If the house is sold, any equity above £100,000 goes to the heir of the property
If the house has declined in value, the loan amount may be higher than the house value. If the house is valued at £100,000, and the outstanding loan is £200,000, the heir has to pay £95,000- 95% of the house value back to the lender. The remaining loan amount is covered by government insurance
If you decide that you don’t want to keep the property and are happy to sell, you will have to have the house on the market for the minimum appraisal value. If you’re struggling to sell the house, which can happen at different times of year, you can request two 90-day extensions on the original 6 months to pay off the reverse mortgage. For this to be approved, you will have to show some evidence that you’re trying to raise the finance to keep the property, or have proof that you’re trying to sell the house- usually, a listing document will be enough for this.
If you don’t want to keep the property, and don’t want to go through the process of trying to sell, you can hand the house over to the lender to deal with. This is referred to as a Deed in Lieu of Foreclosure, where you can sign the deed over to the lender and free yourself from any connection.