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Reverse Mortgage & Inheritance

I inherited a home that has a reverse mortgage. Can I stay in the home?

My parents passed away earlier this year. They had a reverse mortgage. The reverse mortgage company has lien on the house. My parents left the house to my brother in the will. My parents attorney keeps asking him if he wants to go through probate and have the house put into his name. Can he have the house transferred to his name with a lien on it from the reverse mortgage company? Since he was living with them and still lives in the house what are his legal rights as far as staying in the house? Will he be required to sell the house to pay off the mortgage? If he stays in the house, what fees or penalties can the reverse mortgage company impose on him? 

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Bill's Answer
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Updated: Sep 23, 2014

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Highlights

  • Learn what happens when you inherit a home with a reverse mortgage.
  • Understand what steps you have to take, if you want to stay in the home.
  • Contact the reverse mortgage holder and keep the lines of communication open while you decide what to do.

As the probate attorney probably explained, your parents never stopped owning the house, even after they took out the reverse mortgage. It is not the case that the bank assumes ownership when the reverse mortgage is issued or takes ownership after the mortgage holder dies. Your parents could have sold the home, if they had wished, and they were certainly able to leave the home to heirs of their choosing. The key factor is that whether the home is sold by the heir or the heir wishes to reside in the home, the reverse mortgage balance needs to be paid off.

It is standard in a reverse mortgage that the loan comes due when the last mortgage holder dies or when he or she leaves the home. Collecting on the monies that were disbursed to your parents, plus interest, was the basis of the lender making the loan in the first place. How much is owed on the reverse mortgage depends on how much your parents borrowed and how much interest has been charged.

Your brother, the heir, can stay in the home or choose to sell it. He is not liable to pay fees to the reverse mortgage company, but does have to pay the lender. Federal law states that an heir that wants to own the property must pay either the mortgage balance or 95% of the appraised value of the mortgaged property, whichever is less. During the time that it takes for the loan to be paid off, interest charges may continue to accrue, depending on the contract terms. Your brother can borrow money, obtaining his own loan, if he qualifies. He can also choose to sell the home, though you were clear his preference is to remain there.

If there is not enough equity in the home to pay the reverse mortgage lender, your brother is not liable for any shortfall. Unfortunately, real estate values have fallen in many areas, so it has happened that what was borrowed by the reverse mortgage holder ends up being greater than the current market value of the home. Again, if that turns out to be the case that the sale of the house to a third party, at a fair-market price, does not cover the amount owed, the heir is not responsible for the remaining balance owed. The mortgage holder is left with that loss as a cost of doing business.

It is important for your brother to contact the loan servicing company and to discuss the situation. Generally, the heir will have a number of months to finalize a decision on what to do, but the time available to the heir can vary. Find out what timeline the lender expects. Stay in contact with the lender. Let the lender know if the plan is to sell or refinance. It may be necessary to show some proof of the course of action being pursued, such as furnishing the lender with proof that the home is listed or that a loan application is in process, to assure that the lender understands the heir’s plans.

It is generally not the lender’s desire to foreclose on the home, but if the heir is non-communicative and the loan is not being paid back, foreclosure is the only option the lender is left with.

Recommendation

Your brother must decide whether to find a mortgage for the house or sell it. As discussed above, if your brother does nothing eventually the local sheriff will remove him from the property and it will be sold as part of a foreclosure. If your brother wishes to stay, he needs to qualify for a  mortgage. He can apply for a mortgage with one of our pre-screened mortgage partners.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

14 Comments

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  • RB
    Mar, 2013
    Rochell
    Reverse mortgage statement: current outstanding principal balance is $61,515.80. Is this the amount I would have to pay in full to stay in the house?
    0 Votes

    • BA
      Mar, 2013
      Bill
      I am assuming that you inherited the property, from the page on which you left your comment. If that is the case, then you do have to pay off the outstanding balance on the reverse mortgage in order to take ownership of the home. The number you listed is likely what you have to pay or close to it. I recommend that you contact the lender and get a precise payoff balance.
      0 Votes

  • AS
    Jan, 2012
    Andrew
    My mother held a reverse mortgage since December of 2006. She passed away on September 13, 2011. I was not only my mother's caregiver, but I, myself am on disability. The other heir to the estate is my sister, who as well is on SSDI. The home is in a senior community in Central New Jersey and just for interest, 30% of her township is in some sort of foreclosure. This township is known for all of the over 55 communities within the township and the real estate ads depict photos that categorically are in any of these over 55+ clusters. My mother left no other assets and aside from her social security depended on the reverse for income, supplementary medical insurance, etc. As of this date the townhome is well underwater and my attorney is insisting on a $5,000.00 fee upfront to handle a "lien in lieu of foreclosure." We are absolutely shocked since that leaves barely 5,000.00 between my sister and I, exclusive of me getting out of the house. Aren't their provisions for disabled heirs? Disabled heirs who were also caregivers for 4+ years that will allow us to handle this matter ourselves with the reverse mortgage company.
    0 Votes

    • BA
      Jan, 2012
      Bill
      I recommend that you speak with the lender. From the information that you provided, I see no need to pay a lawyer to deal with the mortgage. You do not need to pay for any fees for the reserve mortgage, as the lender will foreclose and sell the property. Any tenants will be obligated to leave the property. If you are interested in purchasing the property, there are circumstances whereby the heirs can purchase at 95% of the current appraised value. Of course that means that you will need to qualify for a mortgage loan.
      0 Votes

    • AS
      Mar, 2012
      Andrew
      Hi Bill, My final question before I send off documents to the reverse mortgage lender One West Bank, FSB, (d/b/a) Financial Freedom: The borrower on the reverse loan is solely my mother. I am reading too much that I'm getting confused as to the credit ramifications to either me as executor and heir and to my sister, heir (50/50). Are we nailed for the foreclosure? The closing was held in my mother's house and it amounted to signing and signing approximately 70 pages. The only signature the FHA wanted was mine, as POA. I don't see how that would legally bind me in any way. My mother was in good health and remained in good health until September 13, 2011 when she had a fatal fall. But under no circumstances did I have to exercise my rights as POA, except when she was in a rehab from surgery and I managed her bills via her checking account, putting POA after my signature which was on file with the bank. Thanks for your help Bill, Andy
      0 Votes

    • BA
      Mar, 2012
      Bill
      Andy, in general, heirs are not liable for the difference between the amount borrowed in a reverse mortgage and the house's eventual sales price when the borrower leaves the house to reside elsewhere or dies.

      You ask me to comment on a contract I have not read. Consult with a lawyer who has real property or contracts experience before you sign the contract to make sure it does not contain any surprises. Better safe than sorry.
      0 Votes

  • RJ
    Oct, 2011
    Rodney
    My best friends father died and he received a letter stating he now owes money from his fathers reverse mortgage from some bank in CA. We took it seriously until a year passed and we heard nothing. Could this have been a scam or should we prepare for him to be kicked out? Also he wants to stay at the house but they were not being upfront with him about trying to get a mortgage. It all sounds like a scam. We haven't heard anything in months. Is this normal?
    0 Votes

    • BA
      Oct, 2011
      Bill
      The bank's only financial recourse is to take the property and sell it. If the sale brings more than your friend's father owed, then the proceeds transfer to his estate.

      Once you friend's father died, however, the bank can sell the home if an heir does not get a loan or use his own funds to pay the bank off. If your friend can't or doesn't wish to get a loan, then he should be prepared to be evicted.

      It seems unusual that so much time has passed without real action from the lender, but nothing much I hear about the mortgage world these days surprises me.
      0 Votes

  • MM
    Sep, 2011
    Marie
    My sister and I are in a similar situation, except we do not have good credit enough to qualify for a loan and the mortgage holder is dancing around a date we are required to move they are giving us generalities which we can't operate on when finding another place to rent. Is there by law a certain number of days after the reverse mortgage holder dies that the remaining inhabitants have before being forced to move?
    0 Votes

    • BA
      Sep, 2011
      Bill
      Not that I am aware of. State laws set the minimum number of days that must pass before a mortgagee can evict a tenant or owner, but not a maximum.
      0 Votes

  • SP
    May, 2011
    Sandra
    Can a daughter who has durable power of attorney apply for a reverse mortage on behalf of her 79yr old mother.
    0 Votes

    • BA
      May, 2011
      Bill
      Depends on the language in the power of attorney. The person who hold the POA should consult with a lawyer to learn exactly what the POA allows him or her to do.
      0 Votes