Reverse mortgages can be a big help to seniors who need extra cash, but they can become a big headache for the person’s family members after they pass away or move to a nursing facility. Family members need to be aware of their rights and obligations, because they usually have to make decisions quickly after a person dies or moves.
Reverse mortgages allow homeowners who are at least 62 years old to borrow money on their house. The homeowner receives a sum of money from the lender, based largely on the value of the home, the age of the borrower, and current interest rates. The loan doesn’t have to be paid back until the house is sold or the homeowner moves out or passes away.
If a couple takes out a reverse mortgage together and one spouse dies, but the other spouse continues living in the house, then nothing happens. But when the last homeowner dies or moves, the entire loan suddenly becomes due.
What happens next usually depends on whether there’s significant equity in the home. If there is, then most commonly the person’s executor will sell the home, pay off the loan, and distribute the remaining equity to the heirs.
If the family wants to keep the home, then they can do so by paying off the loan from other assets.
What if the home is “underwater” and the loan amount is greater than the home’s value? In such a case, it’s important to know that the owner’s estate is not responsible for the difference. The lender can foreclose on the home, but the lender can’t force the heirs to make up the difference between the loan amount and the value of the house.
Generally, the family can stay in the house while the lender forecloses, or simply turn the keys over to the lender and walk away.
Another option is that the family can keep the house by paying the lender 95% of the appraised value of the home. Although this amount will be less than the amount of the loan, the lender is required to write off the difference, and the family will get to keep the property.
In general, the heirs have 30 days to decide what they want to do with the house, and up to six months to arrange financing. (They may be able to get an extension for up to a year if they can show that they’re actively seeking financing or a sale.)
Unfortunately, many family members have no idea what their rights are in the immediate aftermath of a family member’s death. And many lenders these days aren’t notifying heirs about their rights, and are immediately beginning foreclosure proceedings.
Also, many reverse mortgages have been sold to seniors by salespeople who are less than scrupulous. I handled a case a few years back involving a married couple who took a reverse mortgage on their home after the husband was diagnosed with a terminal illness, and the medical expenses were eating away at their savings. Unwittingly, this couple was convinced they could get more money if they transferred the house into just the husband's name. When he died, the company holding the reverse mortgage attempted to evict the wife - who had been told she would be able to remain in the house until she died. The salesman was long gone. The bank holding the note didn't care about these promises - they wanted their money. This proved an expensive lesson for this family.
If you have a reverse mortgage, it’s very important to discuss these issues with your family so they will be prepared if something should happen to you.