Consequences of a Reverse Mortgage on Your Heirs
In 2007, the number of reverse mortgages peaked at approximately 115,000. By 2012, the number fell to 51,000. At the same time, the rate of default on reverse mortgages rose to approximately 9.4 percent of loans in 2012, up from 2 percent a decade earlier, according to the Consumer Financial Protection Bureau. There is no data on how many heirs are facing foreclosure because of reverse mortgages but that is a growing problem for children of parents who took out a reverse mortgage.
Previously we’ve spoken with Stewart, Melvin & Frost real estate attorney Scotty Ball about reverse mortgages. Scotty will discuss the consequences some families are facing when reverse mortgages come due and they want to keep their parents’ home.
Question: Scotty before we get into the pitfalls, will you give us a quick overview of a reverse mortgage?
Scotty: Reverse mortgages are available to homeowners 62 and older and allow the homeowner to borrow against the value of their home. The difference between the reverse mortgage and a home-equity loan is the reverse mortgage does not require monthly payments on the debt.
A reverse mortgage is also known as a “non-recourse” loan because retirees can live in their homes as long as they wish without the burden of regular loan payments.
Reverse mortgages are sometimes viewed as last resort for homeowners because you are “reversing” the equity that you’ve saved up in your home. For some retirees on a fixed income, a reverse mortgage is a necessity to pay their bills. They can be a good financial strategy if done correctly, especially if you need the money and don’t want to move out of your home.
If the borrower decides to leave the home or passes away, their families decide whether to pay back the money or turn over the home to the lender with no other financial obligations.
Question: That’s where the consequences for the heirs come in. What are some of the pitfalls and consequences heirs are facing now when they inherit the reverse mortgage debt?
Scotty: Families turned to reverse mortgages to keep their parents in their homes. In many cases, the parents wanted their children to inherit the home but the debt incurred through the reverse mortgage is pushing the children out. Depending on how much money the parents received in the reverse mortgage, the debt can be staggering for the heirs if they want to keep the house.
Many heirs may not completely understand the process if they want to pay the debt and keep the house. And might not know their rights or what opportunities to settle the debt are available. Such as under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. That’s a key piece of information heirs need to know and many don’t know that.
There are other facts that heirs might not know that can help them deal with the fall out of the reverse mortgage such as all reverse mortgage borrowers pay into a federal insurance fund each month. So if the home is sold for less than the debt, any shortfall is covered by a federal insurance fund.
Some heirs also are having difficulty navigating the process of getting information from lenders on how to keep the family home.
Question: What do reverse mortgage companies have to do when borrower dies or moves out of the home?
Scotty: All reverse mortgages are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home.
The lender will send a repayment notice to the executor, administrator or heirs stating that the loan is due and must be paid. Most lenders will also mention the options available to satisfy the loan. One option is to sign a deed in lieu of foreclosure, if the loan balance is more than what the property is worth. The other option is to sell the property, pay off the loan balance and keep the difference.
Federal law requires that lenders must offer heirs up to 30 days from when the loan becomes due to determine what they want to do with the property, and up to six months to arrange financing. Most important is a rule that allows heirs to pay 95 percent of the current fair market value of the property — a price that is determined by an appraiser hired by the lenders.
Question: What should people be doing if their parents have a reverse mortgage and they maybe in a position of inheriting the debt?
Scotty: Educate yourself and know your rights. If your parents have a reverse mortgage, it is important to gather information from the lenders on how to proceed if the parents leave the home or pass away. Mortgage companies don’t want to go through the foreclosure process. It is time consuming and costly for them. If you understand the process and know your rights it will be easier to deal with the mortgage company and the debt.