Homeowners age 55 and older have the option to take out a specific kind of loan called a reverse mortgage. These equity solutions allow the borrower to draw down cash out of the home's value to meet living expenses during retirement. The borrowers don't make monthly payments on a reverse mortgage, but they must meet three requirements.
- The borrowers must live in the home as a primary residence. Most lenders require you to notify them if no co-borrower will be living in the house for an extended time. Generally, the rule of thumb is you must live in your home for 6 months + 1 day out of each year. It does not need to be consecutive but rather can be cumulative. There certainly are circumstances where someone needs or wants to be out of the home for a more extended period of time. If that were to come up, you simply notify your servicing company, and they will notate your file. The most important task that you must take care of is the annual occupancy certification. This is a form that will be mailed to you on the anniversary of your loan. You sign it and by doing so, you certify that you are still living in the home as your primary residence. If you cease to live in your home as your primary residence, the loan may be called due and payable.
- The borrowers must stay current on property taxes, homeowners insurance, and HOA dues, if any. Failure to do so will put your loan into default. Some minor exceptions may be made to help you in these cases, but it is a big, big deal. If you are not able to keep up with your taxes and insurance and HOA, you should consider selling your home.
- The borrowers must keep the home in good condition. The lender has the right to inspect the home although there would have to be some pretty major issues going on for an inspection to be called for. If an inspection finds the home in disrepair, the borrowers will receive notice of the findings and will have 60 days from the date of that notification to make the repairs. Failure to make the repairs can place the loan in default.
The loan is not due for repayment until the last borrower dies, leaves the home, or fails to maintain the property requirements. When any of those things happen, the loan comes due. Adult children who want to keep the house should look for a way to pay off their parent's reverse mortgage.
What Are Your Responsibilities as an Heir?
When your parents leave their home due to illness or death or can no longer meet the requirements for property upkeep, your options as the heir depend on multiple factors, some of which you are in control of, and some of which you are not. However, it is essential to understand that you are not personally responsible for any balance owed on the reverse mortgage. This is a non-recourse loan which means that the home is the only security for the loan. If the loan is “underwater” neither you nor your parents, are responsible for any deficit.
Assuming that there is no other co-borrower living in the home and accessing the benefits of these equity solutions, the usual courses of action to settle the debt are to:
- Sell the house to pay off the mortgage.
- Refinance the home into someone else's name, such as an heir.
- Pay cash to settle the balance of the loan.
- Surrender the house to the lender as payment for the debt.
You will have up to 12 months to satisfy the debt. This timeframe will be incremental, and each increment must be approved by the servicer, so it is important that you stay on top of the progress requirements. The most important thing to remember is to stay in touch with your servicer.
What About Co-Borrowers?
The loan becomes due and payable when the last co-borrower leaves the home due to death or illness or can no longer meet the loan requirements to maintain the property. If one co-borrower dies, the other co-borrowers can still access the benefits of the reverse mortgage equity solutions as long as they can meet the obligations.
As an heir, you need to understand who is on the documents as a co-borrower on your parents' reverse mortgage. For example, if both your mother and your father are the co-borrowers and your father dies, your mother can stay in the home as long as she can meet the requirements of the loan: pay the property taxes, insurance, and HOA (if any), as well as maintain and live in the home. However, if only your mother’s name was on the reverse mortgage, your father may have to leave the home when she dies unless he or someone else can refinance the loan into his name. Your mother would be considered a non-borrowing spouse, and the rules regarding this arrangement are complicated. If you find one of your parents in this situation, you should contact the loan servicer immediately. There have been many changes to the “non-borrowing spouse” rules, and they will be able to review your parent’s options. If you are not satisfied with the options presented, you may want to consult with an attorney with experience in this area.
What If You Are Selling the Home?
One of the most common ways to satisfy a reverse mortgage loan balance is to sell the home. This step can be the most straightforward route if no heirs are interested in keeping the property. When a family has multiple heirs, they should talk candidly about their wishes for the house. Having these conversations in advance means you won't have to make big decisions amid grief after your parents die.
If you decide to sell the home, you will likely have one of two possible outcomes. As you prepare, the advice of an experienced realtor can help you determine what to expect based on market factors in your area.
- The home sells for less than the balance due. In this case, neither the heirs nor the estate, are personally responsible for the difference. The lender takes whatever the home brings and then submits a claim for the balance under the Federal Housing Administration's insurance program.
- You sell the house, bringing more than the amount required to pay off the loan balance. When this happens, the heirs keep any money left over after the loan is paid in full.
What If You Are Refinancing the Home in Your Name?
If you want to keep the home after your parents die, and the mortgage in question is a Home Equity Conversion Mortgage or HECM, you must either pay the loan or 95% of the property's appraised value, whichever is less. A HECM has the backing of the United States Department of Housing and Urban Development's Federal Housing Administration, which gives lenders greater security against default. The HECM is the most common type of reverse mortgage, but other similar equity solutions do exist. If the mortgage in question is not a HECM, this information may not apply, and you should seek guidance from your lender specific to your situation.
Sometimes heirs describe this process as "buying back" their parents' home from the lender. However, it's important to remember that the lender doesn't own the house in a reverse mortgage. Your parents owned the home, and that ownership passes to you as the heir. Still, as part of the reverse mortgage loan terms, the balance must be settled if you want to keep the house.
How Do I Learn More?
The most important thing families can do to manage a reverse mortgage effectively is to communicate clearly, early, and often. Parents should make sure their heirs know that the reverse mortgage is in place so that the parties can agree on a repayment plan. The Reverse Mortgage Group experts are uniquely familiar with the concerns and questions that adult children often have when parents consider a reverse mortgage. We're ready to give you all the information you need to help you make an informed decision.
At The Reverse Mortgage Group, Beth Miller-Rowe and her team bring decades of experience in the mortgage industry to your equity solutions. They understand what a big decision a reverse mortgage is for the whole family and want everyone to understand the process thoroughly. We offer phone, ZOOM, or in-home consultations so that you can be comfortable in your surroundings while you discuss these matters. Contact us today to see if a reverse mortgage is right for your situation.
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