Reverse Mortgages and Heirs
A reverse mortgage allows people age 62 or older to borrow on their home’s equity. Reverse mortgages can be a convenient method of obtaining additional cashflow. The mortgage has ramifications for heirs, however. While many spouses have preferential treatment and may continue to remain in the home after the death of the other spouse, other heirs will not have that same option.
If one spouse has died but the surviving spouse is listed as a borrower on the reverse mortgage, he or she can continue to live in the home and the terms of the loan do not change. However at the death of the last borrower, adult children and other nonspouse heirs must pay off the loan to keep the home They can keep the property, sell the property, or turn the property over to the lender. Whether there is equity left in the property will influence that decision. Soon after death, the lender must be repaid the remaining value of the reverse mortgage or 95% of the home equity, whichever amount is lower to keep the home. Any difference is covered by federal mortgage insurance.
Heirs have an initial six months to pay off the loan. They can request up to two 90-day extensions. To receive an extension, they must establish that they are arranging financing or actively attempting to sell the house. Until the loan is settled, interest accrues.
When the last owner dies, the estate’s executor should contact the lender. Lenders also track deaths and will send a notice to heirs if they find that the last borrower has died. Loan proceeds disbursed as monthly payments will stop. Within 30 days of notification, the lender will send an appraiser to determine the home’s market value.
If the heirs sell the house, the home must be listed at a minimum of the appraised value. The 5% difference helps cover the realtor commission and other selling costs. If there is no equity, the heirs may decide to enter into a deed in lieu of foreclosure arrangement where the heirs sign the deed over to the lender.
If you have questions about how a reverse mortgage can impact your estate planning, consult with an experienced estate planning attorney.