One of the largest misconceptions with reverse mortgages is that the homeowner loses ownership of the home, and they cannot pass the home onto their heirs. That is simply not true, you still retain ownership, and you can absolutely still pass the home to your heirs in the future. Moreover, there are no major differences between a traditional mortgage vs. a reverse mortgage when passing a home onto the heirs. As a matter of fact, because a reverse mortgage is a non-recourse mortgage, the reverse mortgage provides additional protections for the homeowner and the heirs that a traditional mortgage typically does not provide.
Since the reverse mortgage does not need to be paid off until the last living borrower permanently leaves the home, the reverse mortgage can remain in place for many, many years. The date when the reverse mortgage is due and payable is the youngest borrower’s 150th birthday. However, once the homeowner no longer occupies the home as their primary residence, the clock starts ticking for the reverse mortgage to be paid off. From the time the homeowner permanently leaves the home, the reverse mortgage must be paid off within 6 months. FHA does allow up to two 90-day extensions in many cases which can provide the family up to a total of 1 year to pay off the reverse mortgage.
The heirs have several options, and each option needs to be considered. So, let’s take a closer look into the different options that the heirs have to payoff the reverse mortgage:
The heirs can sell the home and pay off the reverse mortgage. If the sales price is greater than the reverse mortgage balance, the heirs can sell the home, pay off the reverse mortgage and keep the remaining equity/ proceeds, just like if there was a traditional mortgage. However, if the reverse mortgage balance ends up being greater than the value of the home, the heirs can still sell the home for fair market value. In this case, the heirs would sell the home for fair market value and the entire reverse mortgage balance would get paid off (even if the amount owed was above the value of the home) and the heirs would have no financial liability or debt. The reason is because reverse mortgages are non-recourse mortgages and the homeowners, and the heirs do not have any financial liability for the reverse mortgage. The house is the only recourse.
The heirs can pay off the reverse mortgage and keep the home. The heirs can pay off the reverse mortgage with cash, inheritance, life insurance or any means that they would like. Alternatively, they can get a new mortgage to pay off the reverse mortgage and keep the home. If the mortgage balance is greater than the value of the home, the heirs have the ability to “buy the house” at 95% of fair market value and the entire reverse mortgage goes away. Let’s take an example: When Mom and Dad pass away, their reverse mortgage balance is $1M and the home is only worth $800K. The heirs can keep the house by paying $760K (this is 95% of the $800K home value) and the entire $1M reverse mortgage would be paid off in full with no recourse. In this example, the homeowners would use $200K more equity than actually existed and the heirs would inherit the home for only 95% of the fair market value. In my opinion this could be considered a windfall for both the homeowners and the heirs!
The last option would be to turn the keys over to the lender and do what is called a deed-in-lieu of foreclosure. In this case, the heirs simply walk away from the home and the heirs have no financial liability for the home or the reverse mortgage balance. I do not typically recommend this option, but it is certainly an option that is available to consider under certain circumstances.
The irony of this concern is that 99% of seniors want to pass their home onto their kids and 99% of adult children do not want their parents’ home. Therefore, 99% of the time, the kids will inherit their parents’ home and simply sell the home and pay off the mortgage. With all this being said, it is likely the heirs could inherit less equity, but it is also possible that they could inherit more cash instead when the reverse mortgage is used strategically in an orchestrated strategy during retirement.
By Gabe Bodner. Gabe is a retirement mortgage planner and licensed mortgage originator in Colorado. Gabe utilizes the latest research from the top researchers to assist his clients to live for today and
plan for tomorrow. To reach Gabe, call 720.600.4870, e-mail [email protected] or visit reversemortgagesco.com.