As more seniors turn to reverse mortgages, their adult
children might well be puzzled or concerned about what will happen to that debt
when one or both of their parents eventually dies. At that time, questions
about how to pay off the loan will need to be resolved - and relatively
quickly.
Loans are due when borrower dies.
Nearly all reverse mortgages today are home equity
conversion mortgages, or HECMs, which are insured by the Federal Housing
Administration. HECMs are subject to certain rules that might not apply to
non-HECMs.
The first thing adult children should know about HECMs is
that these reverse mortgages technically become due and payable when the
borrower dies.
A harsh letter
Instead, what usually happens in practice is that the loan
servicer sends out a letter that might seem insensitive, but is intended to
inform the heirs of the rules and ascertain their intentions for the loan and
property.
The servicing companies have had issues with people not
notifying them and trying to stay in the home, so that's why it needs to be
harsh, communication is vital.
Notice of demise
Servicers use a number of resources to find out that a
borrower has died. These include the Social Security death index, proprietary
databases and annual occupancy letters that typically are sent to reverse
mortgage borrowers.
If they don't get the letter of occupancy back or property
taxes or insurance aren't paid, they start doing the next steps: contacting an
alternate contact, searching other records or sending someone out to inspect
the property and see if someone is living in the house.
Refi, sell or deed
The borrower's heirs aren't required to sell the home to pay
off the reverse mortgage. But if heirs want to keep the home, they'll have to
pay off the loan.
If they want to get a loan in their own name and pay off the
reverse mortgage, they can but if they can't and there are no other assets,
like life insurance, other property or a 401(k), that they could use to pay off
the loan, they will have to sell the property.
When heirs sell, they typically can choose their own real
estate broker. The heirs manage the sale and keep any capital gain after the
loan and closing costs have been paid.
The borrower's personal belongings and furnishings can be
removed. Fixtures, as defined by state law, can't.
A tenant living in the property might have certain rights and
protections under state law.
Spousal rights
If the borrower was married, the surviving spouse might be
able to remain in the home even if he or she wasn't a co-borrower. That's
important because some borrowers remove a younger spouse from their home's
title to secure a larger reverse mortgage, leaving that younger spouse
vulnerable to eviction and foreclosure after the older spouse's death.
The rules that affect surviving non-borrower spouses are
complicated, and surviving spouses and heirs may need to consult an attorney to
interpret their rights and options if the spouse wants to continue occupying
the property.
There are serious legal issues and possible grounds for a
legal challenge if the lender forecloses while there is still a surviving
spouse.
Upside-down HECMs
The loan servicer usually will order an appraisal to
determine how much the home is worth, Paterson said. If the loan balance is
higher than market value, the heirs can pay off a HECM at 95 percent of that
value.
Another option for heirs is to sign a deed-in-lieu of
foreclosure, giving the house to the lender, to resolve the situation more
quickly.
HECMs are nonrecourse loans, so once the property is sold or
given to the lender, the debt is considered satisfied and cannot be pursued
further against the heirs or the borrower's estate.
If the heirs don't act, the lender can foreclose.
How long heirs have to act
Time frames vary, according to the Department of Housing and
Urban Development, or HUD, heirs can get an extension in some cases if a
reasonable effort is being made to refinance or sell the home, and the lender
and HUD agree to allow more time.
The bottom line is that if the servicer is not hearing from
the family, they will start foreclosure proceedings.