Reverse mortgages, also known as Home Equity Conversion Mortgages (HECM), can be a great way for your parents to tap into their home's equity. These federally-insured loans can provide homeowners with monthly cash payments, based on the equity they've built up.
If your parents currently have a reverse mortgage, it's important to understand what happens to the debt when they pass. When that time comes, lenders may want to move quickly. While this type of loan can be great for retirees, it is important for heirs of the property to be aware of their obligations.
Being prepared and understanding the "ins and outs" of a reverse mortgage can make all the difference for you and your loved ones.
Reverse mortgage loan repayment rules
Although reverse mortgages are indeed loans, unlike a traditional "forward" mortgage loan, your parents aren't required to pay it back as long as their home is their primary residence. Once the home is sold, your parents move out, or pass away and there is no surviving spouse or co-signer, repayment in full is necessary.
Should the home be left to the homeowner's children, the heirs are responsible for the full loan balance. This is regardless of whether or not the heirs intend to occupy the property.
An heir can choose to keep the property, sell it, or hand the keys over to the lender. This decision is usually based on the equity position left in the home.
If you choose to keep the home, you need to pay off the loan.
Fortunately, you should never owe more than the home is worth. In fact, you shouldn't owe more than 95% of the home's appraised value. This holds true even if the loan balance exceeds the home's appraised value.
If the home's value exceeds the balance owed, you can keep the proceeds after selling the home.
Selling a home with a reverse mortgage works like selling any other home. The same rules apply. Consulting a real estate professional can be helpful as they can advise you on how to maximize the value received when selling the home.
On the other hand, if you don't wish to keep the home and the balance exceeds the home's value, you may sign a deed-in-lieu of foreclosure. This route gives the property back to the lender.
What to expect from the lender when your parents have passed
If you're left with a reverse mortgage obligation, you should know your options, as well as your rights.
When a reverse mortgage homeowner dies, the lender must formally notify the heirs that the loan is due. They do this by sending a letter that outlines the rules and options available to the heirs.
Beneficiaries are then given 30 days to figure out their next steps.
Once it's been decided that you'll sell or pay the loan off, you have an additional six months to complete the transaction.
Time frames can vary. According to the Department of Housing and Urban Development (HUD), heirs can get an extension, in some cases, if more time is needed. However, it's imperative that the heirs show a reasonable effort is being made to get the reverse mortgage paid off.
According to experts, some heirs make the mistake of failing to immediately notify the lender of their parents' passing. For this reason, servicers have a number of resources to make sure they are informed about homeowner deaths. Some of these resources include the social security death index, annual occupancy letters, and other proprietary databases.
If the lender doesn't receive the letter of occupancy back, or if the property taxes or homeowners insurance aren't paid, they begin taking steps to reach alternative contacts. Servicers may even send someone out to inspect the property.
Additional reverse mortgage considerations
Although many government-backed loans are assumable, reverse mortgages do not fall into this category.
Heirs have limited options when it comes to refinancing a reverse mortgage after their parents have passed away. Most lenders won't allow heirs to refinance their parent's property without their name being on the title.
Reverse mortgages can be refinanced. They just have to be refinanced by the senior homeowner who originally financed the reverse mortgage, while they're living. Your parents can refinance into a new reverse mortgage with better terms, or they can refinance out of the reverse mortgage altogether should they feel that the reverse mortgage is no longer in their best interest.
In order to ensure a smooth transition out of a reverse mortgage, it's important for heirs to know the rules and to act quickly when their parents pass.