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The letter showed up a few weeks after the funeral. The reverse mortgage on Mom’s house is now due and payable.
Let’s say you’re Mark, 61. Your mother, Helen, took out a reverse mortgage years ago to cover her bills, and she died at 88. You and your sister are her heirs.
Now the lender wants to know what you plan to do, and you’re not even sure the house is worth what she owed.
I’m a CPA, and I’ve served as executor of my parents’ estate. Here’s what I’d tell Mark first: you have options, and you generally won’t be stuck paying more than the house is worth. But the clock starts fast.
The Consumer Financial Protection Bureau says that once heirs receive a due and payable notice, “they have 30 days to buy, sell, or turn the home over to the lender to satisfy the debt.” (1)
That timeline might be extended up to six months so heirs can sell or get their own loan to buy the home. (1)
The U.S. Department of Housing and Urban Development adds that lenders may approve 90-day extensions with satisfactory documentation that heirs are actively trying to sell the home or pay off the loan. (2)
And if Mom owed more than the house is worth? The CFPB says heirs won’t have to pay more than 95 percent of the appraised value, and mortgage insurance covers the rest. (3)
These rules apply to Home Equity Conversion Mortgages, or HECMs — the most common type of reverse mortgage. (3)
Here are 7 moves to make when a parent dies with a reverse mortgage.
1. Call the lender right away
Don’t let the letter sit in a pile. HUD’s advice to heirs is direct: “Contact the HECM lender immediately to review your responsibilities and options.” (2)
In fact, HUD’s 2019 guide for heirs says “The loan must be satisfied within 30 days of the date of the borrower’s death.” (2) So don’t wait for the letter to start making calls.
Ask for the current payoff balance, how the appraisal will work and exactly what paperwork they need for an extension. Get it in writing.
2. Know your three choices
According to the CFPB, heirs can buy the home, sell it or turn it over to the lender to satisfy the debt. (1) HUD says the third option can be done through a deed in lieu of foreclosure. (2)
Keeping the house usually means paying off the loan, and the CFPB notes heirs might need a loan of their own to do it. (1) If you want to keep it, start talking to lenders now, not in week three.
3. If the house is underwater, learn the 95% rule
This rule is worth knowing cold. The CFPB says heirs who want to keep the home will have to repay either the full loan balance or 95 percent of the home’s appraised value, whichever is less. (4)
Heirs who sell can pay off the loan by selling for at least 95 percent of the appraised value. (1)
Here’s how that works with simple numbers. Say Helen owes $310,000, and the house appraises at $280,000. Ninety-five percent of $280,000 is $266,000.
Per the CFPB, Mark and his sister can pay off the loan by selling for at least that amount, and the mortgage insurance Helen paid for covers the rest. (1)
In that situation, they generally don’t have to come up with the $44,000 difference out of their own pockets.
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4. Keep paying the taxes and insurance
Here’s a detail that’s easy to miss. HUD says property taxes and insurance on the property remain the responsibility of the borrower’s estate until title is transferred. (2)
Let the homeowners policy lapse, and a fire or burst pipe could wipe out whatever equity was left. Keep paying until the house is sold or signed over.
5. You may owe little or no tax on a sale
When you inherit a house, your tax basis is generally its fair market value on the date of death, according to the IRS. (5) If you sell it for more than that basis, you have a taxable gain. (5)
That’s good news for Mark. If the house sells for about what it was worth when Helen died, there’s little or no gain to tax. My advice: get a written appraisal as of the date of death and keep it with the estate records.
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6. Thinking about a reverse mortgage yourself? Learn from Helen
None of this means a reverse mortgage is a bad idea. For the right homeowner, it can turn equity into money to live on. The key is knowing how it ends before it begins.
The Federal Trade Commission says that if you’re applying for a HECM, you must first meet with a HUD-approved counselor from an independent housing counseling agency. (6)
You’re still responsible for taxes, insurance and repairs, and the loan generally must be paid back when you die or move from the home. (6)
If you’re 62 or older and own your home, Longbridge Financial is one company that offers a free quote showing what you may qualify for. A licensed specialist then explains what it costs, how repayment works, and what it means for your heirs.
You’d still need HUD-approved counseling, you must keep paying property taxes, homeowners insurance and maintenance, and the loan comes due when the last borrower leaves the home. No obligation. Get the facts in about two minutes.
7. Talk to your kids now, and leave a plan
The CFPB puts it simply: if you have a reverse mortgage and want to leave your home to your children, “it’s important to talk to them now about their repayment options.” (1) It also suggests talking to a professional about an estate plan. (1)
Without a plan, state law decides who inherits, and probate can drag on for months. A will, a trust or both can fix that.
A will spells out who gets what — yours in minutes for $199. A trust goes further, controlling how and when heirs inherit, starting at just $499.
My honest take
A reverse mortgage letter after a funeral feels like a threat. Most of the time, it’s just a deadline.
Read it, call the lender, ask for the extension you need and get an appraisal. Then make a calm decision about the house, not a panicked one.
Helen didn’t leave Mark a debt he has to pay. She left him a house, a loan and a set of rules. Learn the rules, and the rest gets a lot easier.
Sources: 1. Consumer Financial Protection Bureau; 2. U.S. Department of Housing and Urban Development; 3. Consumer Financial Protection Bureau; 4. Consumer Financial Protection Bureau; 5. IRS; 6. Federal Trade Commission
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