A reverse mortgage can help a senior live comfortably by drawing on the equity of his/her home without making mortgage payments. A reverse mortgage provides the borrower with equity funds upfront or on a monthly basis. The mortgage accrues interest, but no payments are necessary until the owner(s) die or moves out of the home.
In the event that the homeowner with a reverse mortgage dies, the heirs have certain responsibilities pertaining to the reverse mortgage. Keep reading to see how a home should be handled in this case.
The General Rule
In general, once the last homeowner (on the reverse mortgage) dies, the loan becomes due and payable. For example, if Joe and Mary are both on the reverse mortgage on their home and Joe dies, Mary can still live in the home without any issue. Once Mary passes away, though, the mortgage becomes due and payable within a six-month period. The faster you pay the loan off, the less interest and mortgage insurance that will accrue on the loan.
Heirs do have a little protection as far as paying off the reverse mortgage. If the value of the home is less than the amount of the mortgage because of a housing value decline, they only owe as much as the appraised value of the home. This leaves the rest of their loved one’s estate untouched; otherwise, the lender would be able to come after the deceased person’s estate, leaving the heirs with very little.
The 30-Day Notice
Once both owners pass away on a home with a reverse mortgage, the lender will send a notice to the heirs within 30 days. The notice will let the heirs know of their options including a due and payable notice. The letter will state how they can defer the payment and what steps they should take.
Generally, the options at this point include:
- Sell the property and pay the loan off in full. If there is any money left after paying the mortgage, it goes to the estate. If the loan is larger than the home’s value, the heirs will owe 95% of the appraised value.
- Keep the property and refinance the loan. The heirs have to pay off the loan in this scenario too, but unless they have cash lying around or the estate is large enough to help them buy the home, they may need a mortgage in their own name.
- Sign a deed in lieu of foreclosure. Heirs can also hand over the title to the lender and they will start reverse mortgage foreclosure proceedings. This eliminates any rights the heirs have to the property.
- Walk away from the home. Heirs can also just walk away from the home, which has the same effect as the deed in lieu of foreclosure. Again, they give up their rights to the property.
Heirs have 30 days after they receive the due and payable letter to make their decision. At this time, they must notify the lender of their choice. They then give the heirs six months to execute that decision.
Asking for an Extension
If the heirs cannot get the issue resolved within six months, they can ask the lender for an extension. Each lender will differ in their requirements and allowance of the extension. Typically, heirs have to be able to demonstrate diligent effort in selling the home or getting approved for a refinance in order for them to approve the extension.
A Non-Borrowing Spouse
It’s important to note that a spouse that isn’t on the mortgage has the same rules as an heir. Just because they are married, doesn’t let them off the hook for the obligation. Instead, the spouse must either get his/her own financing to pay off the loan, sell the home, or walk away from it. Spouses can ask for an extension, but they too must qualify for the extension in order for the lender to offer it.
A reverse mortgage can be a great way to increase a senior’s cash flow, but caution should be executed regarding how the heirs will handle the home. Make sure that everyone is on the same page and understands what needs to be done upon the owner’s death. This way the heirs can protect their interest in the home without losing it to foreclosure.Click to See the Latest Mortgage Rates»