What Happens With a Reverse Mortgage After Death?
Feb. 22, 2023
We’re probably all familiar with television commercials touting reverse mortgages, which provide homeowners with a cash influx for the equity in their home if they’re aged 62 or over. While a lump sum, credit line, or monthly payment can be very attractive in retirement, taking on a reverse mortgage can create challenges for one’s heirs when you and your co-borrower have passed on. The reverse mortgage can become due and payable in 30 days, though extensions are available.
A forward mortgage is what is used when purchasing a home. A lender provides funds for you to acquire the property and you agree to make monthly payments to cover the loan. When, after time, you’ve built up equity in your property, perhaps even paid it off, you can tap into the equity build-up in your home to secure a reverse mortgage – the lender now gives you money against your equity, but it doesn’t come without strings.
If you’re the heir to a home subject to a reverse mortgage in or around Boca Raton, Florida, and need to pursue your rights and obligations concerning the outstanding obligation, contact me at Eric H. Light, P.A. I am an estate planning and probate attorney who can explain the ramifications of the reverse mortgage and present you with your options going forward.
What Is a Reverse Mortgage?
Simply put, a reverse mortgage pays you for the equity in your real property with the provision that the sum the lender provides is paid back when the borrower or last co-borrower passes on. This leaves any beneficiaries inheriting the property with the choice of paying back the reverse funds, selling the home, or assigning the property to the lender.
Spouses and co-borrowers can continue to live in a reverse-mortgage home to the last surviving borrower, but no one else can assume the loan obligation after the co-borrowers’ death. Heirs have the three options mentioned above.
Types of Reverse Mortgages
The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM). These types of loans are insured by the U.S. Department of Housing and Urban Development (HUD), but the insurance applies only to the lender if the home’s value falls short of its foreclosure or liquidation value. Lenders often tout this insurance as a benefit to the recipient, but that is not quite the truth. It protects only the lender.
HECMs have an age restriction starting at 62, but some lenders offer mortgages at age 55 for high-equity properties, which means the lenders aren’t covered by the HUD. This type of a proprietary reverse mortgage can expose the borrower to a greater risk of lender legal actions, although federal law limits what they can do and collect.
Another reverse mortgage variation is the single-purpose reverse mortgage, which is restricted to paying costs for home repairs or property taxes. This type of loan obviously presents less financial risk to heirs.
Heirs and Repayment
As briefly mentioned earlier, when the last co-borrower passes on, the lender will send a Due and Payable Notice to heirs to make good on the funds provided on the equity of the home. Two extensions of up to 90 days each, or six months total, can be applied for, but the options are limited to paying back the loan, selling the home to cover the loan, or assigning the property to the lender.
Fortunately, if the reverse mortgage is FHA insured, then the heirs need only repay the balance of the loan or 95 percent of the home’s value, whichever is less. Also, reverse mortgages are non-recourse loans, meaning that the lender cannot seize or place a lien on the heirs’ property or assets.
Understand Your Next Steps
If you’re the heir to a home with a reverse mortgage, you need to assess your options. You can always seek a new loan to cover the balance due if you don’t have the cash to make good on what’s due. Or, you can sell the home and keep any profits. You probably don’t want to just hand it over to the lender and gain nothing.
If you’re the heir to a home with a reverse mortgage in or around Boca Raton, Florida, contact me immediately at Eric H. Light, P.A. Let’s work together to pursue the most beneficial option.