As seniors turn to reverse mortgages, their children need to know about what will happen to that debt when the parents die.
Nearly all reverse mortgages are home equity conversion mortgagesm – HECMs – that are insured by the Federal Housing Administration.
The adult children should know about HECMs technically become due and payable when the borrower dies. However, a borrower’s heirs probably will not be able to refinance or sell the home on the day of death to satisfy the debt.
What usually happens is that the loan servicer sends a letter intended to inform the heirs of the rules and determine their intentions for the loan and property.
If the servicer does not get a letter of occupancy back, or if property taxes or insurance aren’t paid, the servicer will start contacting an alternate, searching other records or sending someone out to inspect the property and see if someone is living in the home.
The borrower’s heirs aren’t required to sell the home to pay off the reverse mortgage. But if they want to keep the home, they’ll have to pay off the loan.
When heirs sell, they can usually manage the sale and keep any capital gain after the loan and closing costs have been paid.
If the borrower was married, the surviving spouse might be able to remain in the home even if he or she wasn’t a co-borrower. A borrower needs to be careful when removing a younger spouse from their home’s title to secure a larger reverse mortgage. That would leave the younger spouse vulnerable to eviction and foreclosure after the borrower’s death.
The rules that affect reverse mortgages and surviving non-borrower spouses are complicated. Surviving spouses and heirs should consult with a real estate attorney to determine rights and options if the spouse wants to continue occupying the home.
The loan servicer usually will order an appraisal to determine how much the home is worth. If the loan balance is higher than market value, the heirs can pay off an HECM at 95 percent of that value.
Another option for heirs is to sign a deed-in-lieu of foreclosure, giving the house to the lender, to resolve the situation more quickly.
If the heirs don’t act, the lender can foreclose. Heirs should be able to get an extension of time if a reasonable effort is being made to refinance or sell the home. The lender and HUD will usually agree to allow more time. If the servicer does not hear from the family, they will start foreclosure proceedings.
By Harrison K. Long – real estate attorney – Professional real estate representative, Realtor and real estate broker. CAL BRE #01410855 – attorney member of the California State Bar Association #69137. 949-701-2515 (cell or text). HKLong@cox.net. Source of some information is an article at Bankrate.com.
This is for information only about “Reverse Mortgages are Tricky” and is not the providing of legal services. If you have questions about this and your situation, you should contact an experienced real estate attorney.