The beauty of a reverse mortgage is that it can put cash into your parents’ pockets without forcing them to sell the home that they’ve lovingly maintained over the years. They can tap into their equity yet continue to live there for the rest of their lives.
A reverse mortgage is really nothing more than a type of loan against the equity they’ve built up in their property. But loans have to be repaid eventually, and this headache can fall to you and your parents’ other heirs at the time of their deaths. The loan will come due when one or both of them die.
Most reverse mortgages are Home Equity Conversion Mortgages, or HECMs. They’re governed by federal rules through the Federal Housing Administration. The FHA has backed more than a million HECMs since 1990.
Reverse Mortgage Information for Heirs
Your parents won’t have to worry about paying off their reverse mortgage as long as they continue living in the home and don’t vacate it for 12 months or more. But the balance they’ve borrowed against their equity will continue to grow over time because interest on the balance accrues periodically. Of course, they can voluntarily make loan payments even though they’re not required to, or you can do so for them if you don’t want that increasing reverse mortgage balance to get out of hand over the years.
Your parents can take out a reverse mortgage after one or both of them have reached age 62. Your parents must continue to pay for maintenance of the property, as well as taxes and insurance, or they could be in default of the reverse mortgage loan. This can make the balance come due as well.
Factors That Affect Reverse Mortgage Limits
The overall amount of a reverse mortgage loan can be limited by some factors. The home’s value and the amount of equity your parents have in it are obviously key components. The prevailing interest rate at the time your parents take out the reverse mortgage is also a contributing factor, as is the age of the youngest borrower.
For example, the reverse mortgage loan amount would be based on your mother’s age if your mother is 62 and your father is 65. The older the youngest borrower is, the more they can borrow, depending on their equity. But, of course, the more they borrow, the more interest will accrue.
When One Parent Dies
Presuming that your parents took out the reverse mortgage together, the loan does not have to be paid off when the first of them dies. Your surviving parent can continue living there – and nothing changes.
In some cases, your surviving parent can continue to live in the home even if she’s not a co-borrower on the reverse mortgage. The rules for this circumstance changed in August 2014. For reverse mortgages taken out after that time, the non-borrowing spouse can remain in residence after the death of the borrower if they were married at the time the mortgage was taken out and if non-borrowing spouse was named and certified as a spouse in the loan documents. Otherwise, the reverse mortgage loan must generally be paid off within six months after the borrowing spouse dies.
When the Second Parent Dies
You’ll have to pay off the reverse mortgage after the death of your surviving parent if you want to keep the home. The bank doesn’t automatically own the home upon your surviving parent's death, however. You have an opportunity to step in and save it – the only thing that changes is that the loan balance becomes due.
You'll have a 30-day window of time to decide how you want to handle this situation. The lender will send a “Due and Payable” letter to your parent’s estate within this period of time, typically as soon as it receives notice that a death certificate was filed – and reverse mortgage lenders do keep track of death certificate databases The notice will explain your options in more detail.
Reverse Mortgage Heirs’ Responsibility and Options
You’ll effectively receive the difference as an inheritance – or at least your parent’s estate will – if their home is worth more than the reverse mortgage balance. You cannot move into the home or remain living there until you reach a resolution of what to do with the property, but neither do you automatically become personally liable for repaying the reverse mortgage loan upon the death of your last borrowing parent.
You have three choices: You’re free to sell the home and pay off the reverse mortgage loan, or you can otherwise pay off the reverse mortgage loan and keep the property. Or you can step away and deed the home over to the lender, allowing it to take ownership of the house.
Paying it off might involve refinancing if you don’t have sufficient cash available. In any case, the lender will most likely order an appraisal to make sure you’re all on the same page about value, or it will give you the option of doing so yourself within 30 days. The lender must accept either 95 percent of the home’s value or the full amount of the reverse mortgage loan including interest and fees, whichever is less.
Some Extra Steps
Selling the home or refinancing it will no doubt require that you take steps through probate or another legal channel to transfer the title to the home out of your parents’ names and into your own. You’ll generally have six months to refinance, or up to 12 months under some circumstances to sell the house, but you must provide proof to the lender that the property is indeed listed for sale. Interest on the loan will continue to accrue during this time.
Selling for Less Than Loan Balance
You still won’t have any responsibility for paying the reverse mortgage debt if you decide to sell the property but it doesn’t fetch enough to cover your parents’ reverse mortgage loan balance. The loan obligation does not transfer to surviving heirs and it can’t affect your own credit score in any way. The FHA will step in and compensate the lender for the difference in this case because a reverse mortgage is what's known as a "non-recourse" loan.
You can make it easy on everyone involved by arranging for the estate to sign the property over to the lender via a deed in lieu of foreclosure if you know that a sale won’t reap enough to cover the loan amount. Again, this option won’t ding your own credit score in any way.
One caveat: You cannot sell the home to another family member for less than the outstanding reverse mortgage balance. An heir can, however, buy the home for 95 percent of its appraised value.
- All Reverse Mortgage: Reverse Mortgage After Death
- LendingTree: How to Handle a Reverse Mortgage After Death
- GoodLife Home Loans: Are Heirs Responsible for Reverse Mortgage Debt?
- HSH Associates: Paying Off a Reverse Mortgage When a Parent Dies
- Consumer Financial Protection Bureau: Will My Children Be Able to Keep My Home After I Die If I Have a Reverse Mortgage Loan?
- All Reverse Mortgage: How Age Impacts the Home Mortgage Loan Size
Beverly Bird has worked as a paralegal in the areas of personal finance and bankruptcy for over 20 years. She has been writing professionally for over 30 years.