As more seniors turn to reverse mortgages, their adult children might well be puzzled or concerned about what will happen to that debt when one or both of their parents eventually dies. At that time, questions about how to pay off the loan will need to be resolved - and relatively quickly.
Loans are due when borrower dies
Nearly all reverse mortgages today are home equity conversion mortgages, or HECMs, which are insured by the Federal Housing Administration. HECMs are subject to certain rules that might not apply to non-HECMs.
The first thing adult children should know about HECMs is that these reverse mortgages technically become due and payable when the borrower dies.
The word "technically" is important because it's understood that a borrower's heirs can't possibly refinance or sell the home on the day of death to satisfy the debt, said Beth Paterson. a certified reverse mortgage professional at Reverse Mortgages SIDAC, a division of Greenleaf Financial in St. Paul, Minnesota.
A harsh letter
Instead, what usually happens in practice is that the loan servicer sends out a letter that Paterson said might seem insensitive, but is intended to inform the heirs of the rules and ascertain their intentions for the loan and property.
"The servicing companies have had issues with people not notifying them and trying to stay in the home, so that's why it needs to be harsh," Paterson said. "My conversation to the consumer is that communication is vital."
Notice of demise
Servicers use a number of resources to find out that a borrower has died. These include the Social Security death index, proprietary databases and annual occupancy letters that typically are sent to reverse mortgage borrowers.
"If they don't get the letter of occupancy back or property taxes or insurance aren't paid, they start doing the next steps: contacting an alternate contact, searching other records or sending someone out to inspect the property and see if someone is living in the house," Paterson said.
Refi, sell or deed
The borrower's heirs aren't required to sell the home to pay off the reverse mortgage, said Cara Pierce. a housing and reverse mortgage counselor at ClearPoint Credit Counseling Solutions in Fresno, California.
But if heirs want to keep the home, they'll have to pay off the loan.
"If they want to get a loan in their own name and pay off the reverse mortgage, they can," Pierce said. "But if they can't and there are no
other assets, like life insurance, other property or a 401(k), that they could use to pay off the loan, they will have to sell the property."
When heirs sell, they typically can choose their own real estate broker. The heirs manage the sale and keep any capital gain after the loan and closing costs have been paid.
The borrower's personal belongings and furnishings can be removed. Fixtures, as defined by state law, can't.
A tenant living in the property might have certain rights and protections under state law.
If the borrower was married, the surviving spouse might be able to remain in the home even if he or she wasn't a co-borrower, according to Sarah Mancini. an attorney at the National Consumer Law Center, a nonprofit advocacy organization in Washington, D.C.
That's important, Mancini said, because some borrowers remove a younger spouse from their home's title to secure a larger reverse mortgage, leaving that younger spouse vulnerable to eviction and foreclosure after the older spouse's death.
The rules that affect surviving non-borrower spouses are complicated, and surviving spouses and heirs may need to consult an attorney to interpret their rights and options if the spouse wants to continue occupying the property.
"There are serious legal issues," Mancini said, "and possible grounds for a legal challenge if the lender forecloses while there is still a surviving spouse."
The loan servicer usually will order an appraisal to determine how much the home is worth, Paterson said. If the loan balance is higher than market value, the heirs can pay off a HECM at 95 percent of that value.
Another option for heirs is to sign a deed-in-lieu of foreclosure, giving the house to the lender, to resolve the situation more quickly.
HECMs are nonrecourse loans, so once the property is sold or given to the lender, the debt is considered satisfied and cannot be pursued further against the heirs or the borrower's estate.
If the heirs don't act, the lender can foreclose.
How long heirs have to act
Time frames vary. According to the Department of Housing and Urban Development. or HUD, heirs can get an extension in some cases if a reasonable effort is being made to refinance or sell the home, and the lender and HUD agree to allow more time.
The bottom line, Paterson said, is that "if the servicer is not hearing from the family, they will start foreclosure proceedings."