FHA will not take an inheritance as a result of default.
The Federal Housing Administration insures mortgages on forward and reverse mortgages. Forward mortgages, or traditional loans, reduce the amount owed on a home, increasing the home's equity over time. Reverse mortgages -- only available to senior citizens with substantial equity -- allow borrowers to access money in their home, increasing the mortgage debt over time. These FHA loan types impact inheritance in distinct ways.
The Basics
FHA insures mortgages made by approved lenders. It protects the lender by reimbursing its losses in the event of homeowner default. FHA also offers eligible borrowers alternatives to foreclosure, curing the default through partial claim, refinance or loan modification programs. As an agency within the Department of Housing and Urban Development, FHA's main responsibility is to insure the interests of HUD and the lender, paying claims to lenders when borrowers fail to. The lender, rather than FHA, is responsible for collecting after borrower default or death -- instances in which a borrower can no longer continue payments.
FHA-Specific Repercussions
Default on an FHA mortgage impacts a borrower's ability to qualify for another FHA-insured loan. FHA's three-year seasoning rule applies to borrowers with a past deed-in-lieu of foreclosure, short sale or foreclosure on an FHA loan. FHA does not insure loans for those it believes strategically defaulted in order to short sale.
Instead of seeking repayment for a claim paid, or taking a borrower's inheritance, FHA lists defaulted borrowers on a database known as the Credit Alert Interactive Voice Response System (CAIVRS). CAIVRS identification disqualifies those currently in default or with a claim paid in the past three years from obtaining an FHA mortgage.
Lender Consequences
Because the lenders and FHA act independently of one another, after an insurance claim is paid, the lender can respond differently to borrower default. Lenders may pursue a past borrower more aggressively, depending on the state law governing mortgage default. For instance, in a limited number of states, lenders may file a deficiency judgment against a borrower after foreclosure for their losses. In most states, however, the lender generally does not pursue borrowers unless they have substantial assets, according to Mortgage Relief Formula.
State law determines whether the lender can take your inheritance and in what forms. For instance, the lender may not be allowed to place a lien on a home you've inherited, or purchased with inheritance money, but may take funds from a bank account that holds inheritance funds.
HECM
The provisions of FHA's Home Equity Conversion Mortgage (HECM) require the lender to obtain repayment of the reverse mortgage debt by selling the home after the borrower's death. The lender may also obtain repayment when the borrower sells, refinances or stops occupying the home as her primary residence. As the beneficiary of a HECM borrower, the reverse mortgage will likely affect your inheritance because it reduces the amount of equity in the home, and value of the estate.
Lenders may not pursue losses on reverse mortgages if the home sells for less than the mortgage balance owed, according to Mortgage News Daily. This makes the HECM more popular than non-FHA reverse mortgages, as FHA pays the lender for losses suffered.
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