A reverse mortgage is a non-recourse loan that is available for homeowners who are at least 62-years of age. Homeowners with equity may be able to take a loan on the home’s equity without any obligation to pay it back during their lifetime, as long as they continue to live in the property.
When the last borrower dies, the estate has no obligation to repay the loan, even if the loan amount exceeded the property’s value. The difference is made up by reverse mortgage insurance guaranteed by the Federal Housing Administration (HUD) through a Home Equity Conversion Mortgage.
A reverse mortgage can be a good idea under some circumstances. If the homeowners are in considerable debt, then the loan may be used to pay these debts in full. or the homeowner could choose the option to receive monthly payments and use these payments towards their monthly living expenses.
When the surviving homeowner dies, the heirs have a few options. Some heirs may be unaware of these options; the lender should notify them that the loan payments have ceased and the loan must be paid back within twelve months. After the twelve months, the lender will have the home appraised. The heirs should have 30-days from the time of the appraisal to decide on one of these options:
- Pay off the loan at no more than 95% of the appraised value; or
- Sell the house and recoup any remaining equity after paying off the loan balance, or
- Turn the home over to the lender after signing a deed in lieu of foreclosure and walk away with no further obligations
If the heirs elect to buy the property, they must arrange for their own financing if they are not paying cash. This process should be expedited, if possible, since the premiums to HUD and the interest on the balance of the loan will continue to accumulate and cut into any remaining equity.
The heirs only have to pay 95% of the appraised value. For instance, if the property is appraised at $100,000.00 and the loan is $200,000.00, the heirs need only pay $95,000.00 with the remaining sum payable by the federal insurance fund.
If you or your parents are considering a reverse mortgage, consult with an experienced real estate attorney who can assess your situation and advise you on what to expect and how to proceed.
Consult Real Estate Attorney Patricia Bloom-McDonald
Patricia Bloom-McDonald is more than just a real estate attorney. She has been representing and advocating for the rights of the elderly since 2003. A reverse mortgage can help some homeowners, but they need to be aware of all the ramifications. Contact Attorney Bloom-McDonald for a free, one-hour consultation if you are contemplating a reverse mortgage or for estate planning matters.