Inheriting a Reverse Mortgage in Louisiana:
For homeowners who are 62 years of age or older, a reverse mortgage harnesses their home equity to provide cash. With a reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), homeowners can borrow money against the value of their house and get it back as a line of credit, a lump sum, or a fixed monthly payment.
When an heir inherits a home with a reverse mortgage, they inherit not just the property but also the responsibility to pay this loan. If a home still has a traditional mortgage, the heirs are responsible for continuing to make the mortgage payments. Conversely, if the home has reverse mortgage the loan balance is due upon the borrower’s death.
The heirs of the borrower typically have the option to purchase the home, sell it, or give it to the lender if they inherit a house with a reverse mortgage. Homeowners who plan to leave their heirs a reverse mortgage, it is advisable to create an estate plan.
Common Questions When Inheriting a Reverse Mortgage:
What Options do Heirs Have When Inheriting a Reverse Mortgage?
- Keep the home: Heirs have two options if they wish to keep the house: either take out a conventional mortgage on the property or use cash to pay down the reverse mortgage sum. The money from any other assets your loved one may have left you may be applied toward loan repayment, but only if the heirs agree to do so.
- Sell the home: Selling the house is another way to pay off the reverse mortgage debt. Heirs will be able to keep any excess money if you sell the house for more than the loan balance.
- Give the home to the lender: Heirs can sign a deed in lieu of foreclosure if they would rather not worry about repaying the entire loan total. In this scenario, heirs give the lender permission to sell the house.
- If no action is taken: If heirs decide to take no action, the lender will sell the residence after starting foreclosure proceedings.
What Options do Spouses Have When Inheriting a Reverse Mortgage?
A surviving spouse of the original borrower of a reverse mortgage will fall into one of the following categories: the co-borrower, the eligible non-borrowing spouse, or the ineligible non-borrowing spouse.
- Co-borrower: A spouse who is name on the loan will keep receiving benefits from the reverse mortgage and living in the house as they did before their spouse’s death.
- Eligible non-borrowing spouse: If the home is the non-borrowing spouse’s principal residence and they continue to fulfill the loan requirements, such as paying property taxes, insurance, and maintenance, they may be permitted to stay in the house after the borrowing spouse passes away.
- Ineligible non-borrowing spouse: An ineligible spouse will have to repay the loan or lose the home just as any other heir upon their spouse’s death.
What if the Home Sells for Less Than the Amount Owed on the Reverse Mortgage?
If home values have dropped, the property has suffered physical damage or deterioration, or the borrower has lived longer than expected, the sale price of the property may be less than the balance owed on the reverse mortgage. Heirs are only responsible for the lesser of the loan balance or 95% of the appraised value. After the funds from the home sale are applied to the loan, heirs are released from their obligation to pay any outstanding debt. The lender’s loss is instead covered by Federal Housing Administration (FHA) insurance.
A reverse mortgage is categorized as a non-recourse loan. This also means that lenders cannot use other assets that belong to the homeowner or the estate to satisfy the loan.
What Happens if a Homeowner with a Reverse Mortgage Enters a Nursing Home?
Residency is a prerequisite for reverse mortgages. If the homeowner enters a nursing facility permanently, the reverse mortgage loan will become due.
Is There a Timeline to Pay a Reverse Mortgage?
- Thirty days: Following the receipt of a borrower’s notice of death, a lender will notify the decedent’s estate of the amount owed. Lenders issue a Due and Payable Notice to the estate within 30 days of receiving notice of the borrower’s death.
- Sixty days: 30 days after the Due and Payable Notice is sent, heirs must secure an appraisal of the home. Heirs are typically given 30 days to pay off the debt in full or take other actions. A non-borrowing spouse may apply for a deferral if eligibility requirements are met.
- Six months: Heirs must decide right away how they wish to pay off the remaining loan sum. Within six months of the borrower’s passing, a lender may begin the foreclosure procedure.
- One year: If approved by HUD, heirs may apply for two 3-month extensions at a time. If they are granted, the heirs will have a year from the date of the decedent’s passing to pay off the mortgage.
How can Homeowners Protect Their Heirs When Leaving Behind a Reverse Mortgage?
Homeowners should talk to their kids about the loan and the alternatives for repayment if they have a reverse mortgage and wish to leave their house to them. It will be easier for them to decide what to do with the house if provided with information regarding the loan, such as the interest rate, loan balance, and deathbed wishes. Homeowners should also advise heirs of their options, including selling the property to settle the debt or paying back the remaining loan balance.
Homeowners might also think about discussing the creation of an estate plan with a professional.
Life Insurance:
Purchasing a life insurance policy that will cover the entire amount owed on the reverse mortgage is a good idea if it is desirable that children or grandchildren keep the family home.
Last Will and Testament:
Homeowners may also set aside money in their estate. The estate executor may be instructed by a will to use designated cash or other residual assets to pay off the reverse mortgage. By doing this, the title will be cleared to the heirs and the bank won’t pursue them to collect the loan.
Living Trust:
Property with a reverse mortgage can be moved into a living revocable trust. The heirs will no longer have to worry about making the remaining payment. Rather, the trustee will have the authority to use other assets in the estate to pay off the mortgage lender and settle the outstanding balance.
New Orleans Succession Attorneys:
We are a Gretna law firm that has served the New Orleans area since 1980. Our succession lawyers are experienced at handling all types of successions in Louisiana. We can help guide you through the process and advise you of your rights and options if you inherit a reverse mortgage. We take pride in offering a personal and trusted experience. Call us today for a free consultation and find out why so many of our clients come back to us.
