What happens to my Reverse Mortgage and Heirs when I die?
This is a question I get from almost all of my clients. This is partly because they want to know how the heirs will be affected but they’ve also heard some negative stories about the old Reverse Mortgage that can be scary. Fortunately, with the new Reverse Mortgage, this situation is no longer a major issue.
Old Reverse Mortgage and Equity
With the old Reverse Mortgage when the homeowner passed away there usually was no equity left in the home to inherit. In most instances the family simply let the bank foreclose on the home and sell it themselves. This happened because the Old Reverse Mortgage was designed with high-interest rates and high loan amounts. The combination of high rates and loan amounts made it almost sure the bank would get all of the equity after only 10-20 years.
New Reverse Mortgage and Equity
With the changes made in recent years to lower interest rates and loan amounts, the vast majority of homes with the new Reverse Mortgage will always have equity. The only time this is likely to not be true is in times when the housing market goes through a massive and prolonged market correction like what we saw between 2008 and 2012.
As I’ve played with hypothetical projections, I’ve found that even if we average only 2% appreciation long term the new Reverse Mortgage will not exhaust the home’s equity until well beyond 110 years of age.
Options for the Heirs when the home has equity:
When the homeowner passes away and there is equity remaining the heirs will be given 3 basic options.
- The Heirs can sell the home, the proceeds of the sale will pay off the mortgage balance and any remaining funds now belong to them.
- They can keep the home by Refinancing and doing a mortgage of their own to pay off the mortgage balance.
- They can walk away. When this happens, the bank will be forced to foreclose and sell the home to pay off the mortgage balance. If there are remaining funds those still belong to the heirs.
Options for the Heirs when the home has no equity:
In cases where the home is upside down the heirs have two basic options.
- They can walk away. The home is the security of the Reverse Mortgage. Neither the homeowner’s other properties/assets nor the heirs can ever be held responsible for any losses on a Reverse Mortgage. The FHA Mortgage insurance fund guarantees these loans and will cover all losses for the bank.
- If the kids want the home they can buy it for 95% of the home’s real appraised value at that point in time.
- Example – Homeowner passes away, their mortgage balance is $450,000. The home is only worth $400,000. The heirs can purchase the home for $380,000 and FHA will cover the $70,000 loss.
How long do the heirs have?
The answer to this can vary slightly based on the current servicer of the mortgage but in general, Banks want to know within 30 days of the homeowner’s passing. The heirs then have up to six months to sell or refinance the home. If the six months pass and they have not been successful, the heirs can extend for up to 2 additional 3-month extensions to try to sell or refinance.
As long as the family is making a real effort to resolve the mortgage they will have between 6-12 months to do so. After that, the bank will foreclose on the property and distribute any remaining funds once the mortgage balance has been paid off.
This is a complicated aspect of Reverse Mortgages. If you have additional questions please give me a call and we’ll review them with you.
If you or someone you love is considering a Reverse Mortgage give me a call. I’m happy to help in any way I can.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor?s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770