A reverse mortgage is a type of loan associated with home equity that is available to seniors aged 62 and older. The loan does not have to be repaid until the homeowner passes away or moves out of the home.
How does a reverse mortgage work after death?
Your heirs or estate must receive a “due and payable” notice after your death. The notice will outline their options for repaying the loan. They can sell the property, deeding it back to the bank instead of going through foreclosure, or buy it back from the bank within 30 days. They may also have the option to refinance the reverse mortgage loan, depending on the bank.
The amount required to pay off the reverse mortgage obligation is either 95% of the appraised value of the property or the loan balance, whichever is less, if you took a Home Equity Conversion Mortgage (HECM) that is federally insured. The Federal Housing Administration will pay the remaining loan balance if 95% of the appraised value is less. The HECM reverse mortgage is the most common type of reverse mortgage.
Options to avoid the reverse mortgage entering the estate
Your reverse mortgage loan will not be included in the disposition of your estate if one of your heirs buys or sells the property. It is removed from the estate disposition process, provided the home is not bought with estate funds. The funds must come from another source to keep the transaction outside of the estate disposition proceedings.
The specified time frame for your heirs to decide what to do with the property may be extended up to one year. They may be able to obtain this extension if they need additional time to sell the home or arrange their own financing to purchase it.
Consult an attorney or contact the housing counseling agency of the Department of Housing and Urban Development (HUD) for assistance if you want to extend the 30-day deadline.
Your heirs also have the option to deed the home back to the bank through a deed in lieu of foreclosure rather than legal foreclosure proceedings. This is a document that voluntarily transfers ownership to the bank without forcing it to go through legal foreclosure proceedings.
How to prepare your estate for a reverse mortgage
You may also consider setting up a living trust to own your property and thus be responsible for settling the loan after your death. You can include your intentions regarding the property as part of the living trust agreement or formation documents. Your trustee or alternate trustee must comply with these intentions.
You may specify that the loan should be paid off from the sale of other trust assets so that the home can be passed on to your intended beneficiaries. Property owned in a living trust is not subject to probate or court instructions about estate disposition.
Consult an attorney for assistance in creating your estate plan to account for the reverse mortgage. At a minimum, you will want to inform your heirs about the existence of the loan so they can prepare.
Frequently Asked Questions
Does the estate disposition have to occur first when the reverse mortgage borrower dies?
The ownership of the deceased’s assets must be transferred to the living beneficiary after death, as the deceased can no longer legally own the property. Nor can they be liable, so the legal estate disposition process requires the transfer of asset ownership and the settlement of outstanding financial obligations unless other arrangements are made for that. There will be no need to dispose of the reverse mortgage borrower’s estate if these two obligations have been met after death.
Why are you receiving a letter from the legal court regarding your parents’ reverse mortgage?
May
The legal court or executor of your parents’ will will notify you of the existence of the reverse mortgage to ensure you are aware of it and understand your options.
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Sources:
- U.S. Department of Housing and Urban Development. “What You Need To Know if You Inherit a Home That Is Security for an FHA Home Equity Conversion Mortgage (HECM).”
- Consumer Financial Protection Bureau. “What Happens to My Reverse Mortgage When I Die?”
- Consumer Financial Protection Bureau. “If I Have a Reverse Mortgage Loan, Will My Children or Heirs Be Able To Keep My Home After I Die?”
Source: https://www.thebalancemoney.com/how-does-a-reverse-mortgage-affect-estate-planning-5323567
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