How Does a Reverse Mortgage Affect Your Heirs?

When considering a reverse mortgage, it is important to understand how it may affect your heirs. Just like any other loan secured by the property, a reverse mortgage can have a significant impact on those left behind. This article will explore how reverse mortgages influence your heirs and provide useful tips for managing the aftermath.

The Impact on Heirs

Upon the death of the borrower or the removal of an eligible spouse, a reverse mortgage becomes due in full. This means the principal along with any accrued interest and fees must be repaid. As with any other loan, this can be paid either through an heir taking out a loan to acquire the property or by selling the property.

Pre-Planning and Considerations

By using a reverse mortgage, you are essentially converting the equity in your house into a stream of payments, thereby reducing the financial assets available to your heirs. Here are a few key points to consider:

Should you pile up a substantial amount of money and never spend it, it affects your heirs. Conversely, if you spend all your money and enjoy life, it does too. Your right to live in the house as long as you choose is a significant advantage, but ultimately, when you pass, the property must be sold or refinanced to pay off the reverse mortgage.

Understanding FHA HECM Reverse Mortgages

For those seeking a more detailed understanding, the FHA Home Equity Conversion Mortgage (HECM) is particularly relevant. HECM reverse mortgages work similarly to any other mortgage loan, with the crucial difference being that the loan balance grows due to the lack of principal payments to reduce the balance or pay the interest.

The HECM has specific requirements such as at least one owner must reside in the home without more than 12 months of being away. Depending on the home’s appreciation and the equity taken out during the lifetime of the reverse mortgage, your heirs might receive less from the sale of the home than they would have without the reverse mortgage.

Handling the Property After Passing

When the owner of a HECM reverse mortgage passes, the estate must either refinance the home or sell it. The home is encumbered to the mortgage company. The heirs or executors have 30 days to decide whether to keep or sell the property, and then they have 6 months to either refinance or sell the property.

Useful Tips for Heirs/Executors

Here are some actionable tips that can help manage the situation:

Talk to the Reverse Mortgage Lender: The lender can offer valuable advice and guidance. Engage with them to understand the terms and options available. “Non-Recourse” Status: FHA HECM reverse mortgages are “non-recourse.” This means that the only collateral for the loan is the property itself. If the property’s value is less than the mortgage, the lender can only claim what the property sells for. This provides a level of protection for your estate and heirs. Option to Purchase: HUD allows heirs to purchase the home from the estate, but they must pay at least 95% of the home’s current value. This applies even if the home is worth less than the outstanding loan balance.

Remember, the reverse mortgage details will vary, and it is essential to have a clear understanding of the terms. Consulting with professionals, such as mortgage lenders, estate attorneys, or financial advisors, can provide valuable support throughout the process.

Final Notes

This article offers insights based on personal experience as a mortgage lender. It is advised to seek professional legal or financial advice to tailor the information to your specific circumstances.

Disclaimer: Licensed by the California Department of Business Oversight - NMLS 212593. All opinions expressed are from the author's own experience. Programs are subject to change and underwriting approval.