In the next few years reverse mortgages are expected to become increasingly popular in helping to cover living expenses, as baby boomers begin to age. One impact of this is likely to be an increase in the number of children inheriting homes that are attached to these mortgages.
Homeowners age 62 or older are able to get federally insured reverse mortgages that enable them to borrow money using equity in their home as collateral. The proceeds of the home must first be used to pay off the balance on the mortgage, and the homeowners do not need to make any monthly payments. However interest on monthly insurance premiums is charged for the duration of the loan, and the total is due once the homeowner dies or decides to move.
The article in the New York Times points out that many people believe a reverse mortgage is where the lender has an equity share in the property when in fact this type of mortgage is similar to a normal loan. The lender is the first lien holder on the property title, and as such must be repaid if the property changes hands. It’s down to the heirs as to how they decide to handle this repayment, depending on how much equity remains and whether or not they wish to keep the property.
Once the borrower named on the loan has died, federal regulations allow 30 days for the heirs to decide on a repayment method. They then have up to six months to arrange alternative financing or to sell the property, but apparently lenders are willing to be reasonable under the circumstances and many will allow up to two 90 day extensions so long as it can be proven that active attempts are being made to sell the property. If the heirs want to keep the property then it’s up to them to arrange a separate mortgage to pay off the reverse mortgage, or if there is sufficient equity remaining then they can choose to sell the property to pay off the loan.
Importantly, the heirs are not liable for any shortfall if the property fails to sell for sufficient money to pay off the loan in full. If the total of the loan is more than the current value of the home, then the amount owed is limited to 95% of the appraisal value. In such a situation the heirs can choose to deed the property over to the lender. Apparently not everyone is aware that parents have a reverse mortgage, so it must be a bit of a shock to discover this at a time of mourning.