How Does a Reverse Mortgage Work When You Die?

August 25, 2022
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A reverse mortgage is a loan for older people that makes monthly payments to the borrower for the rest of their lives. But when the borrower dies, the debt has to be paid back eventually. Although the loan has a deadline for repayment, the heirs are free to sell or maintain the property as they like.

If you’re thinking about getting a reverse mortgage or currently have one, you’ll probably want to learn more about what happens to the mortgage when you pass away.

Here’s a closer look at the alternatives available to your family, when spouses might be required to repay a reverse mortgage loan, and how you might be able to set up a reverse mortgage to achieve your long-term objectives.

Who Takes Mortgage Loan When You Die?

Usually, when someone passes away, their estate is used to pay off debt. This implies that the executor of your estate will utilize assets to pay off your creditors before any assets can be handed on to heirs.

But the procedure is different when it comes to mortgage debt.

No one has to take on the mortgage unless they co-signed the loan or are co-borrowers with you. However, there are rules in place that permit them to do so if the person who inherits the home chooses to maintain it and take over responsibility for the mortgage. Most frequently, the surviving family continues to pay the mortgage while making plans to sell the house.

If no one steps in and starts paying, the lender will start the process of foreclosing on the house.

Process of Taking over a Mortgage

When a mortgaged property is transferred, a due-on-sale clause, also known as an alienation clause, typically requires that the entire loan amount be repaid immediately. To safeguard property heirs, laws have been put in place that let them acquire the home’s title (making them the property’s actual owners) without bringing the due-on-sale provision into play.

Therefore, if you inherit a loved one’s home after their demise, you can take over the mortgage and resume making the required monthly payments.

Additionally, even if the account hasn’t yet been formally transferred to the successor, they should be allowed to make payments to keep the mortgage current.

This rule has one exemption, and that is when there is a co-signer on the mortgage. If someone co-signed the mortgage loan, they are solely responsible for it, regardless of whether they have any ownership rights to the property.

What Reverse Mortgage Options do You have as an Heirs

Decide what you want to do with the house once you’ve spoken with the mortgage servicer. This could become complex if there are several heirs or if you aren’t the executor of the will, particularly if the parties involved can’t agree.

We’ll discuss what to do when the circumstances are simple, such as when an adult kid inherits a parent’s home or when a surviving spouse assumes responsibility for a loan they weren’t the original signer of.

Speak with a lawyer if your case is more complicated or if you anticipate conflict among the heirs.

Sell The House

One alternative is to simply sell the house to cover the mortgage and divide any proceeds to the heirs in accordance with the terms of the will or applicable state regulations.

You might have to negotiate even with the best reverse mortgage lenders to transfer the mortgage to you if you want to keep the house.

Ask the servicer about loss mitigation measures that could help you stay in the house and prevent foreclosure if your finances can’t support the monthly mortgage payments as the loan is now structured. One such measure is requesting a loan modification.

The loan balance becomes due following the borrower’s passing if there was a reverse mortgage on the property. The home’s heir will be required to repay the loan if they wish to keep it. If not, they can foreclose on their reverse mortgage by selling the house or giving the reverse mortgage servicer the deed to pay off the debt.

Refinance The Home

When there are several heirs and none wants to keep the house, selling it is an easy solution. What should you do, though, if your co-heirs don’t want to let you keep the house?

Simply buying out the other property heirs is one approach. Naturally, not everyone has the money on hand to do this.

Refinancing can assist in freeing up money that you can use to acquire home ownership by purchasing out the other heirs. However, keep in mind that this also implies that you will be responsible for making all mortgage payments.

Duration to Repay the Mortgage Loan After Borrower Die?

The lender issues a letter known as a due and payable notification upon the borrower’s demise. The family now has a default period of 30 days to repay the loan sum. To give time to sell the house or secure outside financing, the due date can be delayed by up to a year.

Interest Rate on Reverse Mortgage?

Rates for reverse mortgages vary depending on the lender and loan conditions. Although the rates are pretty comparable to those of a typical mortgage, it is always a good idea to search around for the best rates and terms when looking for a large loan.

Conclusion

It’s never pleasant to think about our own passing or the passing of a loved one. But by making preparations now for the future transfer of your property and any remaining mortgage payments, you may assist ensure the comfort of both you and your successors.

You can determine which solutions are most likely to be suitable for your specific circumstances by consulting with an estate planner or financial advisor. The best reverse mortgage lenders in your area should be chosen if you’re thinking about refinancing a mortgage as part of your estate planning or because you’ve inherited a home from a loved one.

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