Some reverse mortgages can be a big help to seniors needing extra cash- but they can become a nightmare for their heirs. Heirs who don’t know their rights may be faced with large bills or threats of losing the house. Fortunately- there are some protections for heirs.
Many reverse mortgages allow homeowners who are at least 62 years of age to borrow money on their house. The homeowner receives a sum of money from the lender- based largely on the value of the house- the age of the borrower- and current interest rates. The loan does not need to be paid back until the last surviving homeowner dies- sells the house- or permanently moves out.
When the homeowner dies with an existing reverse mortgage- the heirs have a number of options- including:
- Pay off the loan
- Buy the house from the lender at 95 percent of its value
- Sell the house and use the proceeds to pay off the loan
- Deed the house to the lender
- Do nothing and let the lender foreclose
If the value of the house is less than the amount of the loan- in certain loans (notably- the HECM reverse mortgage)- the bank cannot go after the estate or the heirs for the deficiency. If the value of the house exceeds the loan- heirs can and probably should sell the house- pay off the loan- and keep the remaining amount.
Under federal law- the heirs have specific time limits to decide what they want to do with the house and a period in which to arrange financing. Unfortunately- according to The New York Times– many lenders aren’t notifying heirs about their rights and are instead immediately beginning foreclosure proceedings or bogging heirs down in paperwork. Many heirs aren’t aware that if they want to keep the house- they can either pay off the loan or buy the house for 95 percent of the appraised value. This can be very beneficial to the heir if the value of the house has gone down significantly since the loan was purchased.
For the Consumer Financial Protection Bureau’s advisory, see “Three Steps You Should Take If You Have a Reverse Mortgage“
To see how a HECM reverse mortgage works in the context of Medicaid and other programs to help seniors remain in their home- see your attorney- who may find this article- Reverse Mortgages In Overdrive: Practical Uses on the Legal Aid and Elder Law Expressway– helpful.