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Reverse Mortgage Heirs: How Much Will You Owe?

December 19th, 2011
     

question-answer

Today we received a question that came across one of my blog posts “The Pros and Cons of the Reverse Mortgage” This is an excellent question that I’m sure most heirs have when families may be considering the reverse mortgage.

“My grandma is 76, retired once but had to start working again to keep up with the property taxes. My father is 52 and moved in with her a while ago so that he could pay the mortgage but now he is falling behind. I help out with what I can but it’s not nearly enough.

Both my grandma and father DO NOT want to leave the house, nor sell it. They both insist that they want to keep the house to pass down to their heirs. They have been looking into a reverse mortgage so I started to read up on them (great article by the way, it’s my biggest resource with all the links and stuff) and I’m concerned because my grandma wants me to promise her that I’ll buy the house when the time comes.

The house was recently assessed at 509,000, they owe 208,000 on it. If they do go ahead with a reverse mortgage and assuming she only use’s the money she receives to pay off the original mortgage (she’s very stable on her living expenses and between my father and I the insurance and taxes will be taken care of) would I be looking at a 208,000 loan when this is all said and done or something much higher?”

Mike,

Good Question and one that needed to be asked depending on what your family’s ultimate plans are to be. A reverse mortgage works exactly the opposite, or in reverse, or a standard forward loan (the regular types of loans everyone is used to seeing). The forward mortgage that she has now is a falling debt, rising equity loan because as she makes payments she slowly pays the principal down and pays the interest that is due every month. A reverse mortgage is a rising debt, falling equity loan because your grandmother would no longer have to make payments of principal or interest, that amount would be added to the balance that would be owed when the loan was paid off (the balance would due once your grandmother no longer occupied the property as her primary residence). Under this scenario, if she lived there for many years, the balance would be considerably higher at the time the loan was paid off.

Having said that, reverse mortgages require no payments of principal and interest on a monthly basis, but there is never a pre-payment penalty and we have had more than one borrower who obtained their reverse mortgage with the intention of making periodic payments to keep the balance from rising significantly.

The last borrowers with whom I spoke about this issue could not make the $2,500 monthly payments of their existing mortgage but felt very confident that at $1,500 they would be very comfortable. They met with their accountant and determined that an annual payment of interest helped them for taxes as well (but I do not give any advice in this area, you would need to speak with your financial and tax advisors for your own circumstances). They determined that rather than pay a monthly “payment”, they would make one payment in December, around the 15th, of each year which would keep their balance from rising significantly, would allow them to keep getting an annual interest write-off for taxes that they needed, and gave them a chance to review their financial position with their financial advisor prior to making the annual payment to see if maybe they should make a larger or smaller payment for any reason or anticipated needs.

This worked for the borrowers at the time because it was a husband and wife, the reverse mortgage was not due and payable until the last borrower left the home and they still had other income which made them able to pay some of their existing payment, they were just no longer comfortable at the entire payment. In your case you have your father to consider as well since he is not old enough to be on the reverse mortgage at this time which means that when your grandmother passes, your father would have to make other arrangements to remain in the home. If you kept the balance down, he may be able to obtain a reverse mortgage on a higher valued property by the time he is 62, but there are several factors to consider that could affect this including interest rates at the time, HUD Lending Limits and property values which are out of your control and could prohibit this plan.

The reason I did bring up the other scenario is that since you are all making payments on the reverse mortgage (or were), taxes and insurance now, you could also do the same thing as the other borrowers, but only pay what you are comfortable with. This would keep the balance down and I would advise heirs to talk to your family accountant or tax advisor for your own circumstances. But this just might be the way for you to save the home at this time while keeping the balance from rising to a point in the future that would prohibit you from being able to refinance it at that time in your own name.

The “wild card” if you will is not knowing the future and the fact that your father is not eligible to be on this reverse mortgage because if something happened to your grandmother, you would either need to be able to obtain permanent financing between the two of you or your father would not be able to remain in the home at that time. The question you all must ask yourselves & heirs is whether or not it is better to get a reverse mortgage and keep the home now; be faced with certain loss of the property if you can’t make the payments (if that is the position you now find yourselves); or sale of the property at this time and can it be done in time if the payments are already in arrears.

A lot to think about I know, but I didn’t want to give you a simple “yes” or “no” answer because there is a lot going on here that needs your consideration.

“Reverse Mortgages & Heirs” by www.allrmc.com

The experts at All Reverse Mortgage® are here to answer your questions! If you have a question regarding reverse mortgages give us a call Toll Free (800) 565-1722 or request a quote by clicking here »

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23 Responses to “Reverse Mortgage Heirs: How Much Will You Owe?”

  1. Donna Weiss says:

    My parents took out a reverse mortgage and are now in the Nursing Home. We had the farm appraised and the reverse mortgage is 30,000.00 more than what the farm is worth. We still want to keep the farm. If we let the back take it back, can we still buy it from them for less than the Reverse Mortgage? My brother is living in the home now and doesn’t have anywhere to live. We are hoping he can stay in the house after the bank takes it back and hopefully we can buy it back from the bank. Not sure what to do so we can keep it.

  2. admin says:

    Hi Donna,

    You don’t have to wait for the bank to take it back and then buy it back. You can contact the lender and let them know that you would like to exercise the option to purchase the property for 95% of the appraised value pursuant to the terms of the reverse mortgage. They will perform an appraisal and it will cost them that much to sell the home anyway so it’s in not only your best interest but theirs and HUD’s as well (they don’t have to market, etc).

  3. Bobby Howell says:

    My mother in law, although aged, died unexpectedly. She is $250,000 (including interest to date) in to a very old reverse mortgage. My wife is the only heir to the home. We would like to keep the home but need some idea of what we’d be getting into. We’d be getting a loan to pay for it.
    One question is—will we then be responsible for debts/liens against the property? The main ones I am concerned about are: back property taxes, just from 2012….and a loan from the state a few years ago for some home inprovements. Both together total maybe $8000 right now. These two places I imagine have a claim on the estate? There is no other money or property other than the home to give anyone anything from her estate. How complicated will all this become in general?
    Thank you. So relieved to have found this site.

  4. Alan P. says:

    Hi,

    My mom is 86 years old and has already informed me and my sister that she has put our names on legal documents to be the owners of her home when she passes away. Her house is paid in full and the approximate value based on the market in her area is $230K – $240K. We are considering a reverse mortgage for numerous reasons. 1) for home improvements (room & bathroom addition, kitchen remodel, pool repair), 2) to pay taxes and other minor bills, 3) living expenses for my mom until she dies. Once mom passes away, would the bank/lender offer my sister and I a new loan for the outstanding amount, or would we retain the existing reverse mortgage? Also, would the bank/lender offer monthly payments on the loan for us, or would they require the entire amount due upon her death?

  5. Mike Branson says:

    Hi Alan,

    The Reverse Mortgage is just like any other loan. When your mother passed, the loan would become due and payable, and you, your sister, or your sister and you would have to decide how you wanted to extinguish the outstanding balance of the loan.

    You could pay the loan off with funds from any source. Money you have, any loan that you applied for and received either as joint borrowers or either one of you independently, or, if one or both of you were living in the home and were 62 or over, you could get a reverse mortgage of your own. Any reverse mortgage you obtained of your own would be a new loan, would be based on the current appraised value and the age of the younger borrower on title at that time. You could also choose to sell the home and pay off the reverse mortgage with the sale proceeds if neither of you wanted to remain in the home.

    Any way you choose, you just need to realize that the loan on the house would become due and payable and you would have to make arrangements to pay off the reverse mortgage from your mother at that time.

  6. Dana says:

    My parents have a reverse mortgage, and I believe more is owed on the mortgage than the house is worth since the home value has dropped significantly since they took out the loan. I am the only heir. My question is, if they both pass and I inherit the house, will I be liable for income tax on the forgiven loan amount? If so, how can I avoid this? Have them change their will? I understand that my parents are exempt from this liability since the house has been thier primary residence for many years. Maybe I should make sure the house is sold or foreclosed before they both pass?
    Thanks in advance for your help!

  7. Mike Branson says:

    Hi Dana,

    You should always seek competent legal and financial advice from licensed professionals in those areas but as the heir of the property, you do not have to accept the home. You can contact the lender and allow them to take the home back and dispose of the property. The loan is a non-recourse loan, which only gives the lender the right to the property in order to settle the debt. This feature is written right into the loan documents.

    You did not sign a Promissory Note agreeing to any obligation and therefore, you have no legal obligation to any lender. The reverse mortgage that your parents signed states that the loan is a non-recourse loan and that no other assets may be considered in the repayment of the obligation and paid for insurance to ensure this. I think that if you check with your attorney and/or CPA, you will find that you are adequately covered and you do not have any potential liability. As I stated though, you should take/send the actual documents to an attorney and let them give you a legal opinion as I am not licensed to do so and I am assuming here that your parents have the HUD HECM Mortgage which may or may not be the case if they took out a privately offered product.

  8. Heloise says:

    Hi My grandmother had a reverse mortgage. She passed away 1 year ago. My mother tried to apply for a reverse mortgage but she is not working.The finance company is now sending letters to the house for a forclosure. Is there any way I can delay this from happening? My mother said she would file a bankruptcy, can that stop the forclosure proceedings temporarily?

  9. Mike Branson says:

    Hello Heloise,

    I cannot give you any legal advice, but most times a bankruptcy filing will stop or delay a foreclosure for the borrower who was on the loan. I don’t know how that would affect your mother’s situation though since she was not the original borrower/homeowner and I would suggest she contact competent legal counsel. By the way though, if your mom is 62, she does not need to be working to obtain a reverse mortgage. You stated that she tried to apply for a reverse mortgage but she was not working and that is not a requirement of the loan. I don’t know what the equity position is and that might create a problem for her, but the job would not so I would encourage her to look into that again if she meets the minimum age requirement.

  10. George says:

    My father has some money available in his reverse mortgage. If he transfers this balance to his checking account to pay for health care and then he passes away without exhausting all his savings do we as heirs have to take all his savings to pay off the loan?

  11. Mike Branson says:

    Hi George,

    Appraisals and values are still one of the biggest problems plaguing all borrowers, both of forward and reverse mortgage loans. The steps taken by Congress with legislation and by HUD have made it tougher on homeowners, not easier. In their attempt to isolate the appraiser to be sure that the appraiser is not unduly influenced to bring in an unsupported value, they have made it extremely tough on everyone. With the advent of the Appraisal Management Companies (AMC’s), appraisers no longer even receive the entire fee as much of it goes to the AMC and appraisers still have the same amount of work for less pay.

    With regard to your circumstances. As just a little bit of history, there are three approaches to value, the income approach, the replacement approach and the sales comparison approach. The income approach is only used with income producing property and indicates a property’s value based on how much rent it can generate. It is not applicable for single family residences. The replacement approach, or cost approach, is also not typically used for residential property due to the fact that properties seldom sell in an open and competitive market for what it would cost to build the structure. So that leaves you with the approach that is almost always used on single family residences, the sales comparison approach.

    The sales comparison approach uses the principle of substitution. In other words, if a knowledgeable buyer and seller were involved in a transaction and the buyer was looking at your home as compared to all the other properties available, which property would he buy and then based on the sales of the homes similar to yours, what would your property be worth? You may have the nicest property on the block and also one of the biggest, but if everything in your neighborhood sells between $150,000 and $165,000, an informed buyer typically won’t come into your neighborhood and spend $250,000 on a home. They would go to a neighborhood of $250,000 homes to purchase there. Now, your home may have the best landscaping, may have been updated, may be remodeled, etc., etc and the appraiser will give it some positive adjustments for these characteristics. However, the appraiser, while mentioning the upgrades you have done, will not value them individually in most cases with the exception of some specific items located on the appraisal grid. Other than those, he/she will give a condition adjustment to the sales comparables that are not in as good as condition as your home that will increase the value, but not dollar for dollar what you put into it for upgrades. The only way the appraiser can justify a higher value is if he/she can show other sales that are more similar to yours with similar upgrades that sold for higher prices that they can use to establish the value for houses that more closely resemble your home.

    So in answer to your question, do some homework in advance. Talk to a realtor and visit other homes in the neighborhood that are up for sale and especially those that have just sold. If you can find out what house similar to yours are actually selling for, there will not be such a surprise and you might even be able to supply the appraiser with a list of properties you feel are the closest to your home that sold in the past 3 – 4 months that support a true value. Listings alone will not work as those homes have not sold and will not bring up your value since you don’t know at what price they will ultimately sell. remember though that listings can be a good indicator of lower values if everything currently listed in the area is listed below the last sales – especially if the last sales are older (many months old).

  12. Teresa says:

    My parents died and left my brother living on the property. He lives off of disability and has no place to go. Can he legally live on the property if he is paying the taxes and insurance on the home?

  13. Mike Branson says:

    Hi Teresa,

    Unfortunately, unless your bother was also of age and on the reverse mortgage as well, the lender will call the loan due and payable with the passing of the last borrower on the loan. Otherwise, borrowers could continually bring younger family members into households with reverse mortgages and the loan would never be repaid. The loans are based on the ages of the borrowers and the benefits are determined by the age of the youngest borrower on the loan at the time the loan is made. HUD can only determine benefits on the reverse mortgage program based on the known factors, such as the ages of the borrowers on the loan. I don’t know if your brother qualifies for other assistance programs, if there is any equity left after the sale of the home which would help him with his further living expenses or if family is a viable alternative, but the loan was never meant to continue to go beyond the lives of the original borrowers.

  14. Linda says:

    Both of my parents passed away in November. They had a Reverse Mortgage. They also had a Will/Trust leaving their assets to the 5 children. They had no more money available with the Reverse Mortgage. They elected the oldest child as the Executor. None of the children want to purchase the home. The Will is being held in a bank for many years. The bank said all the heirs have to sign an Affidavit and pay $100/each before they release the Will. They will only talk to the Executor & she has to bring in copies of their Death Certificates. Do we have to do this? None of the heirs agree to this. Wouldn’t that make us all liable for taxes & Home & Flood Insurance & taxes? If there’s nothing to gain by placing the property in our names, why would we do it? Should we let the bank just Foreclose? My brother still lives in the home. What do you suggest?

  15. Mike Branson says:

    Hi Linda,

    I can’t give you legal advice, but as far as the reverse mortgage goes, you did not sign the Note and Deed and therefore you can never be made liable for any portion of that debt. The reverse mortgage is a non-recourse loan which means that the lender can only look to the property to repay the obligation – regardless of who is on title at the time.

    I also cannot advise you on the will or the bank situation. I would only guess that the decision of whether or not you choose to pay the fee to the bank depends on how badly you want to verify the contents of your parents’ will. Otherwise, it would stand to reason that all siblings could just get one copy, split the cost and then make copies for each other from the one copy.

  16. patrick says:

    My step- parents have a reverse mortgage but are getting to the age of not being able to care for themselves and need to be moved closer to family. We are talking, Arizona to Idaho.
    The house is valued at below what they have currently received from the reverse mortgage. They do not have resources to pay off the debt. What are their responsiblities to the loaner? or Can they walk away without obligation and move? Unfortunately, family does not wants the property.

  17. Mike Branson says:

    Hi Patrick,

    If your parents have to move and there will be a loss on the sale of the property, your parents and the family cannot be made to pay any shortfall owed. The loan is a non-recourse loan and therefore, the only security the lender has is the property. Let the servicer know when your parents are vacating and coordinate with them so that you can do a “Deed in Lieu of Foreclosure”. This would effectively transfer the property back to the lender immediately allowing them to market the home and limit the shortfall from your parents as well as make their neighbors happier by not having a property fall into decay during the foreclosure process.

  18. rob says:

    My question is does the heirs of the property get automatic approval for payment plan to pay off debt If they want to keep property. do they have to meet some requirements

  19. Mike Branson says:

    Hi Rob,

    The Reverse Mortgage becomes due and payable. The heirs can keep the home by refinancing the property with a new loan or paying off the loan with other funds available to them but there are no provisions for a loan or a prolonged pay-back period for heirs. The heirs need to qualify for either conventional or FHA financing on their own at that time or consider selling the home.

  20. Gretchen says:

    Hello

    My mom died a couple days ago. She has a reverse mortage , which paid her more than the house is worth.
    She does not receive any payments now. So that part is done. I know you cannot give legal advise. I just wanted to know about time frames. How long do I have to report her death to the reverse mortgage lenders?
    I am currently living in . The house and have been for awhile. I have no where to go. How long do I have to get a new mortgage or sell it? My mothers death was quick and unexpected. I am afraid now, I have no mom and will be homeless. Thanks

  21. Mike Branson says:

    Hi Gretchen,

    I am sorry to hear about your loss. Keep something in mind, that no matter what your mom owed, you would be able to keep the home for 95% of the current appraised value or the amount owed, whichever is less. Therefore, if the outstanding loan amount is higher than the value of the home, you would be able to pay off the loan at 95% of the current value enabling you to obtain financing. With regard to time frames, if you begin looking into loans for the refinance now, when you do contact the lender (or they contact you), you would be able to show them that you are making a good faith effort to pay off the loan with your refinancing of the loan into your own name. Lenders and HUD will be much more willing to work with you and grant you the additional time you need when they see that you are taking the positive steps required to pay off the loan.

    Ultimately you will need to determine whether you are going to refinance the home, you need to sell the home or you are going to turn it back to the lender if you feel it is not worth it to you to try. They will work with you for as long as they feel progress is being made and they do not want to take the property back, but after several months if they do not see any progress, eventually they will need to make a decision if the loan is going to be paid off. Remember, once they begin a foreclosure, it still takes many months in most jurisdictions before a lender can get a property back from a foreclosure so if they wait 12 months or more before they even begin, it would be many more months after that before they would be able to start marketing the property on their own (which they do not want to have to do). If you start now and get a Realtor to give you a good estimate of the value of the home, that will give you a good idea of the loan amount you would need (the current balance of the reverse mortgage or 95% of the current balance, whichever is less).

  22. DAN BENSON says:

    My brother and I are over 62 years old and own and live in home together not married do we qualify for a reverse mortgage PLEASE ADVISE! THANK YOU

  23. Mike Branson says:

    Hi Dan,

    You do not need to be a married couple to receive a reverse mortgage. You just have to both be over 62 years of age and both occupy the home so from that standpoint, you do qualify.

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