What Happens to a Reverse Mortgage When a Parent Dies in Sacramento?

This is the question people wait too long to ask, because nobody wants to say it out loud. A parent wonders whether the kids will be stuck with a debt. An adult child in Sacramento opens a letter from a loan servicer and does not know what it means.

Both worries are fair, and the rules for what happens next are well defined. At Surroundings, a real estate and lending brokerage, we help heirs with both the sale and the payoff, so here is the plain version.

The loan becomes due. The home is usually sold to repay it, and any equity left over goes to the borrower's estate. Heirs can also keep the home by paying off the loan.

Heirs never owe more than the home is worth. Most reverse mortgages are HECMs, insured by the FHA, and they are non-recourse. If the home sells for less than the balance, FHA insurance covers the shortfall. The Consumer Financial Protection Bureau notes these rules apply to HECMs, and other reverse mortgages can have different terms.

If the surviving parent is a co-borrower, nothing changes. The loan continues, they can stay in the home, and there is still no required monthly mortgage payment.

A spouse who is not on the loan may still be able to stay as an eligible non-borrowing spouse. They must have been married to the borrower at closing and named in the loan documents. These protections apply to loans with FHA case numbers assigned on or after August 4, 2014. The spouse must live in the home, keep up taxes, insurance and upkeep, and cannot draw more money. If your parents have an older loan, check the paperwork now.

Heirs have 30 days after the servicer's due-and-payable notice to respond with a plan, according to the CFPB. The CFPB says that time may be extended up to six months so heirs can sell the home or get their own loan to buy it.

More time may be possible with the servicer's approval, but it is not automatic. Call the servicer early, tell them your plan and keep notes of every conversation. Silence is what causes trouble.

Heirs usually choose one of three paths:

• Sell the home. Pay off the loan from the sale and keep any equity left over.
• Keep the home. Pay the lesser of the loan balance or 95% of what the home appraises for, with cash or a new mortgage.
• Short sale, if the home is worth less than the balance. The home sells for at least 95% of the appraised price, FHA insurance covers the rest, and nobody owes the difference.

Here is an illustration only. Say a Sacramento home appraises at $480,000 and the balance has grown to $510,000. An heir who wants to keep it could pay 95% of the appraisal, or $456,000. Every loan and every home is different.

You may hear about a deed in lieu of foreclosure, where the house is signed back to the lender. It is less common, so ask the servicer and the estate attorney how it compares with a sale.

It depends on how the house was held. A home in a living trust usually passes through the successor trustee without probate. A home in your parent's name alone may need a probate case in Sacramento County Superior Court.

The servicer's timeline and the estate process often run side by side, so bring in the estate attorney early. Who inherits the equity is a legal question for that attorney. Our page on probate and trust sales in Sacramento explains how the sale fits around the court process.

Heirs can handle the sale from anywhere. Documents can usually be signed electronically or with a mobile notary, and the servicer can work with the estate's representative by phone and email.

What matters most is that one person has the legal authority to act. That is usually the successor trustee or the court-appointed personal representative. Until that person is in place, the servicer can talk, but nobody can sign a listing or a sale contract.

The house needs care while it waits. Keep the homeowners insurance in force, keep the utilities on and check on the property regularly. A vacant house that falls into disrepair can lower the sale price, and the loan terms still require upkeep until the loan is paid off.

A few small steps save a lot of stress later:

• Make sure the adult children know the loan exists and have the servicer's contact information.
• Keep the loan documents, the will or trust, and insurance papers in one place.
• Name one person as the point of contact with the servicer.

For a full overview of how these loans work, download Reverse Mortgages, Explained Plainly. If the house is part of an estate, the Inherited Home Checklist puts the next steps in order.

Maggie is both a real estate broker and a mortgage broker, so she can sell the home and coordinate the payoff with the servicer. When you are ready, contact us and we will walk through your parent's situation together.

Maggie B. Hopkins, NMLS #349517. This article is general information, not legal, tax or financial advice. Reverse mortgages are loans with real costs. Borrowers must meet HUD and lender requirements, and all loans are subject to underwriting and approval.