Inherited a Reverse Mortgage? The Equity May Still Be Yours.

When the last borrower on a reverse mortgage dies, the loan becomes due and payable. The family inherits a house with a clock attached to it, and usually a servicer who starts sending letters straight away.

If you have already concluded that the lender is now entitled to the house, you are in large company and you are probably wrong. Most of the time it is simply not so, and the difference between believing it and not believing it is often the whole inheritance.

"Does the lender get the whole value of the house?"

Start here, because everything else follows from it. If the house is worth more than the loan, the payoff is the loan balance. The estate sells the house, the balance is paid at closing, and what is left over belongs to the estate. That is the ordinary outcome, and for a family with equity it is the one to aim at.

So when the servicer asks for an appraisal, be clear about what an appraisal is. It is not the price of your inheritance. On a house with equity, the appraised value does not determine what you owe. The payoff statement does.

"What is this 95 percent rule I keep reading about?"

You will find a great deal written about heirs paying "95 percent of appraised value," and it is usually quoted as though it were the price of getting the house back. It is worth understanding properly, because it is the opposite: it is a protection.

A HECM — the FHA-insured reverse mortgage, which is most of them — is non-recourse. If the balance has grown larger than the house is worth, the family is not responsible for the shortfall. In that case HUD's guidance is that the estate or heirs may sell the home for at least 95 percent of the current appraised value and the lender will accept the net proceeds as satisfaction of the loan. The FHA insurance covers the rest.

That is a ceiling for the underwater case. It is not a floor, and it is not what a lender collects out of a house that has equity in it.

"How much is waiting costing me?"

Equity rarely disappears in one dramatic moment. It leaks.

Interest keeps accruing on the balance after the borrower dies. So does the mortgage insurance premium. Servicing fees go on. Property inspections go on. If the homeowner's policy lapses, force-placed insurance goes on at several times the price of a normal policy. A house that had real equity in it has less of it a year later — and if the servicer files foreclosure, the cost of the foreclosure comes out of the same equity.

HUD's guidance to heirs is that the loan is to be satisfied within 30 days of the borrower's death, and that the lender may approve 90-day extensions on satisfactory documentation that the estate or heirs are actively trying to sell the property or repay the loan. Those extensions matter enormously and nobody volunteers them. You request them, you document what you are doing, and you keep every approval in writing.

"What do I need to ask the servicer for?"

• Authority to act. The servicer will not discuss the loan with somebody who has no standing. Depending on how title was held that means letters of administration from the probate court, or a death certificate and proof that title passed to you directly. Sort this first; everything else waits on it.
• A written payoff statement with a good-through date, not a verbal figure and not an estimate. If what comes back looks like the appraised value rather than the balance, that is the moment to push back.
• The date on the due and payable notice, because every deadline runs from it.
• Every extension approval in writing. A servicer's file changes hands. A verbal assurance from somebody on the phone in March is worth nothing to whoever has the file in July.
• The reinstatement or short-payoff terms in writing if the loan is underwater and you are working toward the 95 percent settlement.

None of that is legal advice, and a reverse mortgage inside an estate is a place where an hour with your own attorney is money well spent. We work with attorneys on these regularly and can tell you what we are seeing, but you want somebody whose only client is you.

"How would you buy it?"

We buy the house from the estate and the balance is paid off at closing, the same as any other sale with a mortgage on it — the difference is that these have a deadline and a servicer attached, and we have been through it before. We can close quickly, which on this particular problem is not a sales pitch: every month the file sits open, the balance is larger.

We also buy them as-is, which matters here more than usual. A house that has been through the last years of an owner's life often needs work, and the estate frequently has no money to do any of it. You are not obliged to clean it out or fix anything. We take it as it stands, contents included.

And if the numbers say the family should list the house on the open market instead, we will tell you that. On a house with real equity and enough time left on the clock, that is sometimes the right answer.

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Other guides

Selling a House in Probate · Inherited a House That Needs Work · When Heirs Disagree · Selling a Hoarder House · Open Permits & Violations · Stalled Builds & Unsafe Structures · Spotting a Real Cash Buyer · Behind on an FHA Loan