I Inherited Real Property with a Reverse Mortgage. Now What?
As the average life expectancy increases, so does the need for long term financial planning. One way many people have decided to address this need and/or to supplement a fixed income, overcome a sudden expense, or to address a downturn in the market is to tap into the equity in their property through a reverse mortgage.
What is a reverse mortgage?
A good way to understand a reverse mortgage is by comparing it to a traditional mortgage. With a traditional mortgage, a person borrows a lump sum from a lender using a piece of real property as collateral, then the borrower repays the loan over time (typically in monthly installments). With a reverse mortgage, real property is still used as collateral, but rather than the borrower making monthly mortgage payments to the lender, the lender makes monthly loan disbursements to the borrower (typically not to exceed, in total, 50-75% of the value of the property).
How is a reverse mortgage repaid?
Upon the passing of the reverse mortgage borrower, the total amount of all periodic disbursements, plus interest, become due and payable in full (**unless the balance has been paid back during the borrower’s lifetime). If the borrower’s estate plan provides for it, estate assets can be used to repay the loan. However, if the estate assets are not sufficient to pay the balance due, then what happens next depends on whether the heir(s) wish(es) to retain the property. If the property is to be retained, the heir(s) should take immediate action to prevent the property from going into foreclosure.
Can I keep the property?
If the heir(s) wish(es) to keep the property but the estate assets are not sufficient to pay the balance due under the reverse mortgage, then the heir can either:
- pay the balance due out of the heir’s(s’) pocket, or
- take out a traditional mortgage, using the property as collateral, and pay off the reverse mortgage with the new loan funds.
What if I don’t want to keep it, but there is still equity in the property?
The property can be sold, and the reverse mortgage (and costs of sale) can be paid out of the proceeds of the sale. If any proceeds are left after the sale (and assuming all other debts of the estate have been satisfied), those get paid to the heir(s). If the proceeds are not enough to pay both the mortgage and the costs of sale, the estate will have to come out of pocket for the remainder as a cost of estate administration.
What if there is not enough equity to pay the reverse mortgage and costs of sale?
Unless the estate or heir(s) is/are able to pay the balance due under the mortgage (and costs of sale, if applicable), the best option may be for the estate to discuss surrender of the property to the lender in exchange for a deed in lieu of foreclosure. What is right for each estate is dependent upon the totality of the circumstances applicable to that estate. Prudent action, therefore, may require consultation with an estate attorney, a real estate attorney, and/or your financial professional (advisor, CPA, etc.).
How do I know which option is best for me?
Terms of reverse mortgages can vary from one lender to the next, and every estate is different. As such, you should consult with competent estate planning and property attorneys who can analyze relevant estate and mortgage documents to determine the best options for satisfying the reverse mortgage while achieving the goals of the estate as well as its heirs.