Impact of Reverse Mortgage on Inheritance

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A reverse mortgage provides the potential for numerous benefits to homeowners. These loans allow property owners to use the value of their homes to cover their financial needs. That may include paying off high-interest debts or having money set aside for repairs or emergencies. However, it’s also important to consider reverse mortgage inheritance rules. What happens to your home after you pass away? How does a reverse mortgage impact your heirs?

Reverse Mortgage Recap

A reverse mortgage allows homeowners age 55+ to access some of the equity in their home. You can use the money from the loan for any need you have. For seniors, income from a reverse mortgage does not impact Old Age Security, Guaranteed Income Supplement, or other benefits. These loans also do not require payments to be made during the loan term, as long as applicants occupy the home for a minimum of 6 months per year, maintain it, and stay current on property taxes and insurance/strata fees.

Surviving Spouses and Co-Borrowing

In situations where a married couple purchases and owns the home together, and one passes away, the surviving spouse can continue to live in the home. They do not have to repay the debt at this point. The loan terms don’t need to change. It’s best for senior couples to set up their reverse mortgage to ensure this is the case as a proactive way of taking care of each other.

What Happens After the Last Borrower Passes On?

Reverse mortgages mature when the homeowners no longer live within the property. This may be due to the owners passing away, selling the home, or moving into a different type of residence. At that point, the loan reaches maturity with all interest, and the principal on the loan is due to be repaid. Most often, the estate is sold to pay off the loan. Any funds remaining after the debt is repaid go to the estate.

The Reverse Mortgage Inheritance Activates

Once the loan comes to maturity, the lender then adjusts timeframes for the loan’s repayment. All lenders provide stipulations on how long the heirs have to repay the loan. The lender sets this date to settle the estate. This gives heirs some time to determine what they wish to do.

Inheritors Decide What to Do with the Property

The beneficiaries or children of the owners can make a decision about the estate based on what they specifically wish to do. They may wish to sell off the property and pay off the debts on it. In this situation, they would keep the remaining value (homes tend to rise in value over time, giving the heirs a higher potential selling point for the property than what is owed on the loan).

Heirs may instead wish to maintain the home, perhaps because it has sentimental value. They may also take steps to gain ownership of the property and then consider the sale of it at some time in the future.

Still, the lender of the reverse mortgage will send a due and payable notice. Most often, there is a 30-day timeframe for heirs to decide on what they plan to do. Many lenders then allow between 3 and 12 months for the reverse mortgage repayment to be made. Some offer up to 6 months to determine financing options.

Heirs may take one of several steps:

No equity: If there is no potential equity left in the property, the heirs may not want to have to worry about the sales process. No Negative Equity Guarantee – should the home be sold for fair market value, and that isn’t enough to pay off the existing reverse mortgage balance, the lender is responsible for that shortfall (some conditions apply).
High equity: In the case where there’s significant potential equity in the home, the heirs may wish to sell the property, pay off the loan, and use the remaining funds any way they would like to.
Retain it: Those who wish to retain the property for any reason may take ownership by paying the full loan amount, all fees, and all interest on it, sometimes taking out their own loan to do so.

Reverse mortgage inheritance can be confusing. That’s why it’s always important to have a team of professionals on your side to help you. Contact us today!