Why reverse mortgage borrowers should inform heirs of the loan
Reverse mortgage borrowers are encouraged to let their children and/or heirs know about the loan to assist the survivors with the loan settlement process.
When a homeowner with a reverse mortgage passes away, the heirs of his or her estate will have several decisions to make about the property. At the same time, the reverse mortgage lender will be trying to obtain repayment on loan. Plus, heirs will also likely be dealing with grief, what to do with the deceased other’s possessions and a host of other estate settlement tasks.
Heirs should have a thorough understanding of:
1. How much the homeowner has,/will borrow. Use the reverse mortgage amortization provided by the lender at the closing of the loan to get a better understanding of how much will be potentially owed.
2. What happens after the homeowner passes away. When the last survivor on a reverse mortgage loan passes away, that officially ends the contract, and the loan becomes due. The lender will send a notice that the loan is payable.
Reverse mortgage lenders are required by law to provide a borrower’s heirs 30 days to determine whether they want to keep the property or sell it. The borrower’s estate should also have six months to arrange to finance.
Also, if they have either not been able to sell the home or arranged other financing, heirs can apply for two 90-day extensions after the six-month term has expired. To get those extensions. However, the heirs must prove they are attempting to obtain the funds to repay the loan or that they are actively trying to sell the home.
3. Their options for repayment. How much the borrower’s heirs will have to repay will depend on the loan balance at the time of death and the home’s market value.
In most cases at the conclusion of a reverse mortgage contract, the home will be sold, and the lender will be repaid from the sale proceeds.
If the home is worth less than the loan balance, then the amount due on loan is equivalent to 95 percent of the appraised value; heirs will not have to pay the full loan balance. For example, if the loan balance is $150,000, but the property only appraises at $100,000, the heirs will only have to pay $95,000 back to the lender.
The borrower’s estate nor their heirs have to cover the difference. That’s because reverse mortgages are non-recourse loans, which means if the borrower defaults or can’t cover the loan balance, the lender can only claim the property that is securitizing the loan; that is, the house from which the reverse mortgage was obtained. The lender cannot seize other assets from the borrower to make up the difference.
Another option if there is no equity in the home at the time of sale is a “deed instead of foreclosure.” This involves a voluntary transfer of the property to the lender in exchange for a release from the reverse mortgage contract. This is a good option if you know your home will not sell for an amount large enough to cover the loan balance on the reverse mortgage, as it removes the burden of trying to sell it while interest and taxes continue to accumulate.
Once the loan officially closes and is repaid, there’s nothing left to the borrower or their heirs to do. If the loan is repaid using proceeds from the property sale and the sale price exceeds the loan balance, then the borrower, the borrower’s estate, or the borrower’s heirs will receive the difference. So if the home sells for $250,000 and the loan balance is $100,000, the estate will keep $150,000 — minus agent fees and settlement costs.
4. Sources of funds for repayment. Keep in mind that the only requirement is that the loan is repaid; the lender won’t care where the proceeds come from. While this is usually done through the sale of the property, the money could also come from other sources, such as a life insurance policy or sale of other assets in the deceased’s estate. Some lenders will even allow heirs to refinance the reverse mortgage loan into a traditional mortgage and make monthly payments.
Even if the borrower’s heirs don’t necessarily want to keep the house, it may be beneficial to repay the loan with other funds instead of trying to sell the home first.
Even with the amount of time afforded to close the loan, borrowers or their heirs should finish the process as quickly as possible. Interest will continue to accrue on the loan until it closes, as will service fees and mortgage insurance premiums. Property taxes and insurance will also need to continue to be paid.
Using another source of funds to close the loan quickly gives heirs more time to determine whether or not they want to keep the property. If they decide to sell it, they have more time to remove contents, make it presentable, and keep it on the market long enough to receive a maximum offer. Paying the loan off before a sale also removes the stress if the home doesn’t sell right away.