My Grandma took out a Reverse Mortgage on her house and has since passed. She died before she had a chance to utilize the $140,000 credit line. When she first applied for the reverse mortgage she had put the house in a trust, leaving it to my brother, sister and myself. It was also stipulated that my dad would receive $25,000 for finishing the house after we had issues with our contractor. My question is, since my grandma's passing the house has been foreclosed on. The original company that she got the reverse mortgage through no longer handles the property. We have no access to the credit line and have been kicked out of our home of 20 years. Is there anything we can do?
The facts in your question are unclear to me. I do not know which party is pursuing the foreclosure and the amount of the balance due. It sounds as if a secondary company controls the loan, and the original reverse mortgage lender is out of the picture. Did your grandparent receive a lump sum in the reverse mortgage? The only debts she should have would either be from a lump sum she received, a monthly payment made to her, or money she used on a line of credit granted to her.
If the reverse mortgage is an FHA Home Equity Conversion Mortgage (HECM), then FHA regulations at 24 CFR 206.125(c) apply when the reverse mortgage borrower, called a mortgagor, dies. As of July of 2011, the following is the law:
When a HECM loan becomes due and payable as a result of the mortgagor’s death and the property is conveyed by will or operation of law to the mortgagor’s estate or heirs (including a surviving spouse who is not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.
What does this mean? If you are a mortgagor’s heir and want own the property, you must pay either the mortgage balance or 95% of the appraised value of the mortgaged property, whichever is less. You must pay the lender a lump sum out of your own pocket, or qualify for a new loan that pays the balance owed. If there is equity in the home, after the reverse mortgage balance is accounted for, it makes sense for the heirs to sell the home rather than let it go into foreclosure.
The reason you cannot use the credit line that was granted to your grandmother is that it was granted only to her. The ability to use a credit line created in a reverse mortgage does not transfer to heirs.
The heirs are not liable for any deficiency balance, but will not be able to reside in the house without paying back all that is owed to the lender. When the loan comes due and there is not enough equity to make good on the balance owing, the bank is stuck with the loss. Again, if it turns out 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 any heir 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, walk away, 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 heirs’ 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. If it moves to foreclosure, the foreclosure does not show on the heirs’ credit report. It usually takes a number of months before the lender moves forward with a foreclosure. That timeframe can be extended, in general, if the heirs keep the lines of communication open with the reverse mortgage holder.
The fact that the house was left in a trust means that you should speak with the attorney who drew up the trust, to see if he or she has any advice.
Bills.com has written extensively about reverse mortgages. See the following Bills.com resources to learn more: Reverse Mortgage & Inheritance, Reverse Mortgage and Medicaid, Is a Reverse Mortgage a Good Choice?, Reverse Mortgage Living Trust, Reverse Mortgage Benefits, Reverse Mortgage Refinance,and the Bills.com reverse mortgage information page.
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