Inheriting a house should be a blessing, but unforeseen financial burdens can change all that in a hurry. If you’ve just learned that your grandma took out a large reverse mortgage on her home before she passed, you’re likely now dealing with a complex and urgent financial situation. Here’s how to size up your options and protect yourself.
Knowing How Reverse Mortgages Work
A reverse mortgage allows a homeowner, usually over 62, to borrow against the equity in their home without making monthly payments. The loan is repaid when the borrower sells, moves out, or passes away. If the mortgage was refinanced, it can drain away a lot of the remaining equity, leaving heirs with very little value in the property.
Run The Numbers And Check The Loan Terms
Contact the reverse mortgage lenders to find out the exact current payoff amount. One or more refinancings of a reverse mortgage could mean multiple liens. The total debt could even be more than the property’s market value, especially if interest and fees have compounded over several years. Knowing the true numbers will help you decide whether it’s worth hanging on to the house or letting it go.
Verify Your Legal Obligations
Reverse mortgage debt is normally secured by the property, and not by the heirs personally. You’re not obligated to pay the balance out-of-pocket unless you want to retain the home. If the debt eclipses the home’s value, you can walk away and let the lender retake possession through foreclosure.
Protect Yourself If You Let The Bank Foreclose
If you want to allow foreclosure, the key is to make sure the property stays in your grandma’s estate and isn’t transferred into your name before the process gets rolling. This way, the foreclosure is tied to the estate, and not your personal credit. A good probate attorney will make sure you don’t accept the deed or assume ownership in any legal documents. This will prevent the foreclosure from ever appearing on your credit report.
The Property’s Market Value
Order a professional appraisal to set the fair market value. This will determine if there’s any equity left over after paying off the reverse mortgage(s). If the value is higher than the total debt, selling the home could leave you with some cash. If it’s lower, you need to decide if sentimental value would justify keeping it.
You Could Sell The Home Quickly
Reverse mortgage lenders normally require repayment within six months of the borrower’s death, but you can request extensions. If you turn around and sell the property right away, you can prevent further interest and fees from eroding equity. If the housing market is up, you may still get back a portion of the home’s value.
The Lower Of Two Values Law
Under federal law, heirs can pay the lesser of the loan balance or 95% of the home’s current appraised value to hang on to the property. That rule is there to prevent families from owing more than the home is worth. This may be an option if you’re determined to keep the home in spite of the reverse mortgage debt.
Request Extensions
If you need more time to sell or get financing in place, you can formally request up to two 90-day extensions from the lender. You increase your chances of success if you can clearly demonstrate good faith efforts to settle the debt, like listing the property for sale or securing a loan to pay off the reverse mortgage.
Get Professional Help
Handling a reverse mortgage can be complicated. Talk to an estate attorney who understands reverse mortgage laws, as well as a real estate professional with a track record in distressed property sales. This will keep you from making any costly mistakes and ensure you meet all your deadlines.
Weighing The Emotional Factor
It must be upsetting to inherit a family home, only to discover it’s a toxic asset. Keep in mind, this isn’t a reflection of your grandmother’s love for you. Many seniors end up turning to reverse mortgages. But your focus now should be on making the most practical financial decision you can for your future.
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