A few weeks ago we received a call from a woman in crisis. Her mother had died just five days earlier, and she was already receiving foreclosure notices from the bank pressuring her to complete the mortgage payments after her mother’s death. This was a reverse mortgage, and the balance of the loan was around $500,000. The property was worth far more than that, but the bank wanted its mortgage paid in full immediately, and our client didn’t have the cash to pay it, or to empty and stage the house for a quick sale.
Unfortunately, this is an increasingly common scenario. A reverse mortgage can be an invaluable resource for seniors who want to age in place. But reverse mortgage payments are due after death, and lenders waste no time staking their claim on that asset. If you find yourself in this situation, don’t panic. You do have options, and you do have (a little) time.
Here’s what you need to know about reverse mortgage payments after death, and how to meet that obligation while maximizing the value of the estate.
1. You don’t necessarily owe the full amount of the loan.
First, reverse mortgages are “non-recourse” loans, which means that if the outstanding balance on loan exceeds the value of the house, the estate is not on the hook for the difference. You can just hand over the keys and walk away. Second, if you want to keep or sell the house, you only have to pay the amount of the outstanding loan balance or 95% of the appraised value of the home, whichever is lower. That’s because the vast majority of reverse mortgages are insured by the federal government, which will make up the difference.
2. The lender has no claim on the contents of the house.
Any personal property in or around the house belongs to the estate. If there are valuable assets, such as jewelry, artwork, or antiques, it’s important to go through the house as quickly as possible to secure those items.
3. Time is of the essence.
By law, you have 30 days to respond to the lender’s first letter. In reality, though, it’s imperative to move as quickly as possible after death of the property owner because the primary lien holder (the mortgage lender) can begin foreclosure proceedings immediately. Even if the bank agrees to give you some time to decide what to do, monthly interest and insurance costs will continue chipping away at what’s left of the equity. And if the lenders sense you’re dragging your feet or not working in good faith, they can be very aggressive about coming after their assets.
Unless you have the cash to completely pay off a mortgage after the death of the owner, the best way to capture any remaining equity in a house is to sell it. If you list it with a realtor, most lenders will demand a signed listing agreement within 30 to 60 days of the borrower’s death, and the asking price has to be at least enough to cover the loan. Then you have to demonstrate that you are doing everything possible to sell the house.
That’s a pretty arbitrary measure, though, and if the house doesn’t sell quickly enough the lender may decide that you’re asking too much for it or hindering the sale in other ways. They can step in at any point and still foreclose. If that happens, you lose all the remaining equity in the house.
That’s why we recommended using an accelerated sale when dealing with a reverse mortgage. Lenders are more willing to work with you when they know exactly when the house will sell and that the reserve price will cover their loan. That’s how we were able to help our client after her mother died.
With the clock ticking, our client’s initial thought was to give away everything inside the house that she didn’t want for herself, then take the $600,000 offer she received from a house flipper, just to get out from under the loan. Instead, we emptied the house and listed it for sale at auction within 21 days – fast enough to push back the reverse mortgage lender. The house sold for $1,023,000.
Of course, every situation is different. If you inherit a property with an outstanding reverse mortgage you’ll need to run your own numbers to determine if there’s enough equity to warrant the expense and hassle of selling it yourself.
Whatever you decide, though, do it quickly. And if you’re not familiar with reverse mortgages, call someone who is so you’re not dealing with an aggressive lender on your own.