Guess Who Pays the Bill on a Reverse Mortgage

 As baby boomers age, reverse mortgages are expected to gain popularity as a means of covering living expenses. Hence, in the future, more homes passed on to children will come with a bill attached — the balance due on these equity loans.

 Federally insured reverse mortgages, officially issued as part of the Home Equity Conversion Mortgage program, are a way for homeowners 62 and older to borrow money using their home equity as collateral. The proceeds must first be used to pay off any remaining balance on the mortgage, which frees homeowners from monthly payments. Interest and monthly insurance premiums are charged throughout the life of the loan, and the total becomes due when the borrower dies (or permanently moves out of the home).

 As the first lien holder on the property title the lender must be repaid when the property changes hands. How the heirs handle repayment depends on how much equity is left in the home and whether they want to keep it. Under federal regulations, after the last borrower named on the loan has died, the lender must provide up to 30 days for the heirs to decide on a repayment method. Heirs then have up to six months to sell or arrange financing. But, as many as two 90-day extensions are allowed if the heirs can show they are actively trying to sell the property. Should they wish to retain ownership, the heirs might choose to get a separate mortgage to refinance the home and pay off the reverse mortgage. Or, if there is enough equity in the home, they might choose to sell it and use the proceeds to pay off the loan.
 The heirs will not be on the hook for any shortfall should the home fail to sell for enough to pay the loan in full. If the loan balance exceeds the value of the home, the amount owed is limited to 95 percent of the appraised value. In such “underwater” situations, the heirs may instead choose a deed in lieu of foreclosure, in which they simply deed the property over to the lender.
 Heirs should be aware that the ability to draw on the reverse mortgage ceases once the borrower dies. For that reason, Ms. Dye recommends that the family consider whether enough money has been set aside for things like funeral expenses while funds are still accessible — that is, if the family discusses finances at all.
Source: "Retiring on the House" The New York Times (Feb 13, 2014)

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