After Death: What Heirs Need to Know About Reverse Mortgages

If a person is 62 or older, owns a home, and needs extra money to travel, pay for medical treatments not covered by their insurance policies, or to spend on day-to-day living expenses, they could take out a reverse mortgage. Instead of making payments to the lender, the homeowner receives them, with the monthly amount depending on factors including age, equity in the home, the market value of the property, and interest rates. The essential idea is to create a stream of income from a person’s non-liquid assets so that the person can have a better quality of life during their last years as they continue to live in their home.

But, what sounds grand in the relatively short term could cause some concerns for those who will inherit the property. Here are three essential things for heirs to know about reverse mortgages after the property owner’s death. Keep in mind there are companies such as HSC Equity that offer loans and other financial solutions to bridge potential problems.

Non-Recourse Loans

Anyone who remembers the 2009 financial crisis which was fueled by greed in the home lending sector and the lack of confidence in mortgages and borrowers’ ability to pay, remembers how wildly housing prices skyrocketed in the years before the crash. Then, when borrowers stopped paying, housing prices in many areas of the United States tumbled as foreclosures ran rampant, ultimately leaving home values “underwater” with loan holders owing more on their loans than their properties were worth.

This is something heirs might be concerned about if their parents or loved ones took out a reverse mortgage. But the good new is that should the value of the property for which the reverse mortgage was issued become less than the loan amount, the lender can’t go after the heirs for the difference. Michael Branson in Forbes writes that if the heirs want to keep the home, they’ll never have to repay more than 95-percent of the value of the home, regardless of the loan balance. In these situations, FHA insurance covers the lender’s shortfall. Borrowers pay mortgage insurance premiums on loans with reverse mortgage companies in California and elsewhere for this protection, Investopedia points out.

Keeping the Home

If heirs decide to keep a home that’s subject to a reverse mortgage, they must be mindful that they have a six month period to pay off the loan, and they’ll have to continue to pay interest and insurance until the loan is settled.

To keep the home, heirs must pay off the reverse mortgage. If the heirs don’t have enough cash to do so, they’ll need to take out another mortgage or loan on the house. As long as they’re owners of the home. they’ll have property taxes and insurance to pay as well.

If the homeowner’s intention had been to leave the house to his or her children, taking out a reverse mortgage make that an impossibility if the heirs can’t come up with the funds to pay off the reverse mortgage.

Selling the Home

As with all home sales, if an heir wants to sell a home with a reverse mortgage, an appraisal is needed to determine the value of the home. A real estate agent would also need to be consulted unless heirs want to try to sell the house themselves.

The appraiser and the realtor might give the heirs different prices. This is not uncommon as the latter is usually trying to get the top price a buyer is willing to pay. For example, sometimes a buyer wants a house that’s close to a certain school or place of employment, making him or her more willing to pay more than the appraised value of the home.

Proceeds from the home’s sale must first go toward paying off the reverse mortgage, just as they would with a home with a conventional mortgage. Any unpaid insurance fees or taxes will also need to be taken care of. Only after these liens are cleared do any proceeds go to the heirs.

A reverse mortgage can do financial wonders to improve the quality of life of the homeowner, but heirs need to be wise about the pros and cons of keeping or selling the home, knowing that at least they’ll never have to repay more than 95% of the value of the home regardless of the loan balance.

Additional Options

When considering the pros and cons of reverse mortgages to provide a livable income, it’s advisable to also look at the potential for using a viatical settlement to free up extra cash. For instance, American Life Fund offers viatical settlements as another way to get cash if a person is terminally ill. This can be pursued at the same time as a reverse mortgage, or it can be pursued independently. Essentially, a viatical settlement broker arranges for a person’s life insurance policy to be bought at a percentage of its face value. The money goes to the policyholder and the buyer gets to cash in the policy when the person dies. A life insurance policyholder with a terminal illness might consider this a death benefit for him before he actually dies.