Reverse Mortgage Inheritance
- A reverse mortgage is available to homeowners age 62 and older.
- A reverse mortgage stays with the property and must be repaid.
My parent had a reverse mortgage and died unexpectedly. I inherited the property. What happens to the reverse mortgage?
My mother died last year unexpectedly. She had a reverse mortgage through Wells Fargo. I got into a nasty battle with them because they have refused to acknowledge me as the heir to her property although she had a standing will in place, and was one of many documents given to them before & after her death. A lawsuit has surfaced over her death, and has drained me financially. I need to keep the house -- this is where I live. Any ideas on how to handle this crisis?
Before I discuss the facts you raise in your question, let us review reverse mortgage basics.
Reverse Mortgage Basics
A reverse mortgage is a unique loan because there are no payments required from the borrower. Instead the homeowner receives cash from the lender and in turn, the lender gets the rights to a portion of the homeowner’s equity. A reverse mortgage loan is designed to give older homeowners the ability to receive tax-free income without making payments, selling their home or changing the property's title. For older homeowners -- you must be 62 years or older to qualify -- a reverse mortgage can be the right way to receive extra income or piece of mind in retirement.
A reverse mortgage is repaid when the borrower ceases to live in the home. This can be a result of the homeowner selling the home, moving out (and it is no longer their primary residence), or dying. In any of these cases, the lender can foreclose and sell the property. If the home is worth more than the balance of the loan, the lender pays the surplus to borrower or the borrower's estate. If the home is worth less than the balance of the loan, then the lender must write-off the loss. Reverse mortgage lenders cannot collect deficiency balances from the borrower or his or her estate.
Reverse mortgages have a special rule for heirs who want to buy the borrower’s home. Heirs can pay either the loan balance or 95% of the appraised value of the home, whichever is less.
Consider an estate plan before you get a reverse mortgage. If you have a spouse or others you want to inherit the home, you need to put a plan in place so they can afford to pay-off the loan. You can, for example, take out a life insurance policy that pays the beneficiary an amount equal to the market value of the property. Let us say the beneficiary was named in the will to receive the home with the reverse mortgage. Upon the homeowner’s death, the beneficiary/heir will receive the life insurance benefit. The heir also gets the home subject to the reverse mortgage. The heir can use the insurance money to pay off the reverse mortgage and keep the home, or if they don't want the home, they can pocket the insurance benefit.
Now let us change the facts slightly. Let us say there is no insurance policy and the homeowner with a reverse mortgage dies. The heir has the option to walk away and receive the proceeds of the sale after the home is sold. Or, the heir may get a conventional mortgage, pay off the reverse mortgage, and do what he or she wishes with the property.
You mentioned a will and property inheritance. As discussed above, you inherited the property subject to its encumbrances, which is a reverse mortgage. You have two options under normal circumstances:
- Leave the property. If the home is worth more than the balance of the loan, then you will receive a check from Wells Fargo after it sells the property. If the home is worth less than the balance of the loan, then Well Fargo will need to eat the deficit. Neither you nor any other heirs have liability for the deficiency.
- Tell Wells Fargo you want to buy the property. If you take this option, Wells Fargo will hire an appraiser to learn the fair market value of the home. If the fair market value is more than the loan balance, then you can buy the property for the amount of the loan balance. If the fair market value is less than the loan balance, then you can buy the property from Wells Fargo for 95% of the appraised value.
Here, you mentioned you want to stay in the home. If so, you must pay Wells Fargo either the balance of the reverse mortgage, or 95% of the appraised value, whichever is less. You may need to qualify for a mortgage.
However, you mentioned a lawsuit. You did not specify if you filed the lawsuit against Wells Fargo or if Wells Fargo is suing you. If you sued Wells Fargo, I can only imagine you did so on the theory Wells Fargo did not disclose all of the terms and conditions to your parent, or that your parent was incompetent and did not understand the consequences of her actions, and therefore Wells Fargo committed fraud. If Wells Fargo filed a lawsuit against you, I would imagine it would be a form of unlawful detainer to remove you from the property.
If you have not consulted with an attorney in your state, do so immediately. If you cannot afford an attorney, call your county bar association and ask for the contact information for the organization that assists people in your area with low or no income who have civil litigation questions. Make an appointment with that organization and bring all of your documents relating to the lawsuit and your mother’s will to that meeting. An attorney or paralegal will advise you of your rights and liabilities.
I hope this information helps you Find. Learn & Save.