Important Reverse Mortgage Facts To Consider
Communication with the loan servicer is critical to ensure loans do not come due before the death of the occupant.
If your parent or loved one has a vacation home where they spend a portion of the year, it is especially important that they remain in open communication with their reverse mortgage servicer, since there are stated restrictions on how long borrowers are allowed to be absent from the property.
Borrowers should always reach out to their servicer to seek HUD approval before leaving on any extended trips or absences from their property that extend beyond 12 months.
If a borrower is absent from their primary residence for longer than 12 months or has permanently moved from their primary residence, then the loan servicer must seek approval from HUD to call the reverse mortgage due and payable.
Once approval is obtained, the servicer mails a demand letter to the borrowers requiring them to either repay the loan in full or cure the loan default by re-occupying the property as their principal residence.
If your loved one is considering a reverse mortgage, and you would like to know more about this financial product, contact us today for more information.
What To Ask A Lender About Reverse Mortgages
Before getting a reverse mortgage, ask your lender about:
- how you can get the money from a reverse mortgage
- if there are any fees you have to pay
- what interest rate you have to pay on the money you borrow
- what can cause you to default on the loan
- any penalties you have to pay if you sell your home within a certain period of time
- how much time you have to pay off the loans balance if you move
- how much time your estate has to pay off the loans balance if you die
- what happens if it takes your estate longer than the stated period to fully repay the loan when you die
- what happens if the amount of the loan ends up being higher than your homes value when it’s time to pay the loan back
If Your Heirs Need To Sell The Home
Some heirs may lack funds to pay off the loan balance and may need to sell the home in order to repay the reverse mortgage loan. If the balance owed on the loan is more than the home is worth, your heirs wont have to pay the difference. If your heirs sell the home, the lender will take the proceeds from the sale as payment on the loan, and the FHA insurance will cover any remaining loan balance.
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Ways To Receive Money From Reverse Mortgage
Lump-sum: A lump sum allows the borrowers to receive the reverse mortgage proceeds at once at the loans closing. It carries a fixed interest rate, unlike the other options having variable interest rates.
Equal Monthly Payments: This option requires that the lender make steady monthly payments to the borrower, provided the borrower uses the mortgaged house as the principal residence.
Line of Credit: This option allows the homeowner to borrow money when they need it, charging interest on what is borrowed.
Term Payments: Here, the lender enables the borrower to receive equal monthly payments for a duration set by the borrower.
Term Payments Plus a line of credit: Under this option, the borrower receives money from the lender in equal monthly payments for a specific period. If the borrower requires additional cash after the set term ends, they can turn to line credit.
Equal Monthly payments and line credit: This option allows the lender to give steady monthly payments, provided the borrower lives in the mortgaged home as their principal residence. Should the borrower need additional cash at any point, they can utilize their line of credit.
What Happens To A Reverse Mortgage When The Owner Dies
For elderly Australians who own a home but dont have much cash in savings, a reverse mortgage can become a source of income and help fund their retirement. However, before you jump in, you need to also consider the interest payable on a reverse mortgage along with the principal or loan amount. Most lenders wont ask for repayments whilst youre still living in your property, but they will want the loan repaid if you die. This will leave it in the hands of your beneficiaries to sort out how the debt is repaid. If anyone is living in the property, they may need to move out.
Due to ASIC regulations, lenders only offer reverse mortgages worth up to 25 per cent of a propertys value with the expectation of selling the property to recover the loan if the owner dies. Given this scenario, you should consider the impact of your death upon those living in the property with you when taking out a reverse mortgage, as they may have to move out.
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How Does A Reverse Mortgage Work
While a conventional mortgage advances you funds in order to buy a house, a reverse mortgage is just the opposite: It advances you funds from the house you already own.
Qualifying homeownerswho must be age 55 or oldercan borrow up to 55% of the value of their home . To maintain eligibility for the loan, the borrower must maintain and remain in the house as their principal residence, pay the property tax bills and keep valid insurance in place, but there are no restrictions on the use of the funds once theyre in your hands. If one spouse dies, the surviving spouse is not required to repay the loan, as reverse mortgages are not callable .
When youve established a reverse mortgage, you receive funds tax-free either as a lump sum, or as regular monthly deposits. Interest accumulates on the loaned funds as they are received. The reverse mortgage becomes due when the last surviving owner dies, if the house is sold, or if the homeowner or homeowners move out of the home.
Today, there are two providers of reverse mortgages in Canada: HomeEquity Bank and Equitable Bank.
Equitable Banks reverse mortgage rate is 5.49% for a five-year fixed term, while HomeEquitys rate is 5.59%. If youre thinking these rates are significantly higher than rates for regular mortgagesyoure right .
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Making Sense Of This Loan Program
Reverse mortgages allow borrowers to enjoy their golden years without having to worry about their home loan. If youre at least 62 years old, own your home, and live in that home as your primary residence, you may be eligible for this loan. Youll just continue to be responsible for property taxes, homeowners insurance, and general upkeep.
Interested in learning more about reverse mortgages? American Financing has you covered with various resources dedicated to this loan program. Check out why you should use a reverse mortgage, the benefits of a reverse mortgage, and whether this loan retires with you.
You can also call one of our mortgage consultants at 910-4055.
Repayment Rules For Reverse Mortgages
Even though a reverse mortgage is a loan, youre not required to repay it as long as youre using the home as your primary residence. The only time that repayment in full is required is if you move out, sell the property in order to buy a new house or pass away leaving no surviving co-signer. If youre married and your spouse still lives in the home, repayment can be deferred until their death.
So what does this mean for someone who inherits a home with a reverse mortgage? Essentially, the beneficiary would be on the hook for the full loan balance. It wouldnt matter if they planned to live in the home or not. The lender would still expect them to pay off the reverse mortgage and any interest thats capitalized over the life of the loan term.
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Parents: Create A Will And Plan Of Action
Beyond ensuring that both spouses are named on the loan, youll also want to create a will that specifies any agreed-upon intentions for the house.
If you and your children have decided they will sell the house when you and your spouse have passed away, you may have specific ways you want them to spend the money. They might include a family trip, grandkids college funds, a down payment for the grandkids to buy their own homes someday.
Or, if you want them to keep the house, detail how it should be divided and used. Is one child receiving ownership of the house? Or will ownership be shared among your children and grandchildren?
The more guidance you can provide your children on what to do with the home, the easier you will make the conversations they must have during the painful time when they are grieving you and trying to put your affairs in order in a way that honors your wishes.
It may even be a good idea to find an estate planner or lawyer who has experience creating wills. They can help you think through the details you may have missed on your own. That way, theres no question about how your reverse mortgage will work when you die.
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Are You Thinking Of Getting A Reverse Mortgage Who Should Consider One And Who Shouldn’t
Representatives from Bank of America did not answer questions about Emiles case.
With funds from Alice Emiles estate dwindling, Emile and his family decided to shift plans and sell the home. That plan failed, too, when the home didnt immediately sell.
Today, the homes market value is more than $400,000.
The outcome left the family with nothing. Emile now rents in Philadelphia. He feels cheated by the long process.
The beginning of all this with the loan worked OK we remodeled the home, made it safe for my mom, Emile said. But after she passed, they were supposed to allow us to maintain some financial stability, and that all totally went away.
How Long Do The Heirs Have
The answer to this can vary slightly based on the current servicer of the mortgage but in general, Banks want to know within 30 days of the homeowners passing. The heirs then have up to six months to sell or refinance the home. If the six months pass and they have not been successful, the heirs can extend for up to 2 additional 3-month extensions to try to sell or refinance.
As long as the family is making a real effort to resolve the mortgage they will have between 6-12 months to do so. After that, the bank will foreclose on the property and distribute any remaining funds once the mortgage balance has been paid off.
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Reverse Mortgage Foreclosure Timeline
Once a reverse mortgage homeowner dies, the lender sends a letter to the heirs explaining that the loan is due. Beneficiaries then have 30 days to figure out how they want to proceed. Thats why lenders suggest finalizing a strategy in advance.
Lenders typically give heirs six months to complete the transaction. Its important to stay on track, whether you end up selling the residence or keeping it. Again, reach out to your lender with updates, and dont hesitate to ask for help along the way.
What Happens When Someone With A Reverse Mortgage Dies
If you take out a Home Equity Conversion Mortgage the most common type of reverse mortgagethe loan becomes due and payable under specific circumstances, like when you die. Your heirs will then have several options for dealing with that debt. They can:
- pay off the reverse mortgage and keep the home
- sell the home and use the proceeds to pay off the reverse mortgage debt
- give the property to the lender, or
- let the lender foreclose.
These options are explained in more detail below along with a brief explanation about how reverse mortgages work.
HECMs are nonrecourse, which means that the lender cant get a deficiency judgment after a foreclosure or deed in lieu of foreclosure.
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When Do You Need To Pay Back A Reverse Mortgage
A reverse mortgage must be repaid in full if the last surviving borrower or eligible non-borrowing spouse:
- Dies
- Sells the home
- No longer lives in the home as their primary residence
The last scenario can occur if the borrower enters an assisted living facility, moves in with family or downsizes.
Most people repay the loan when the owner dies, since the majority of people who use reverse mortgages are those who already have a significant amount of home equity, says Cliff Auerswald, president of All Reverse Mortgage, a reverse mortgage lender.
There are other situations, though, when the loan could need to be repaid sooner. This can happen if the borrower stops paying homeowners insurance or property taxes on the home, or stops maintaining the home and it falls into disrepair.
New Reverse Mortgage And Equity
With the changes made in recent years to lower interest rates and loan amounts, the vast majority of homes with the new Reverse Mortgage will always have equity. The only time this is likely to not be true is in times when the housing market goes through a massive and prolonged market correction like what we saw between 2008 and 2012.
As Ive played with hypothetical projections, Ive found that even if we average only 2% appreciation long term the new Reverse Mortgage will not exhaust the homes equity until well beyond 110 years of age.
Options for the Heirs when the home has equity:
When the homeowner passes away and there is equity remaining the heirs will be given 3 basic options.
Options for the Heirs when the home has no equity:
In cases where the home is upside down the heirs have two basic options.
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Turn Home Equity Into Cash
Theres no retirement like home. If youre like most Canadian homeowners 55 or over, much of what you own fits into one of two categories the equity in your home and the money you have saved. Chances are, the value of your home has grown over the years and makes up a good portion of your net worth. While having a home that has built value is a positive, you typically cant spend that value unless you sell your home. A Reverse Mortgage allows you to turn some of your home equity into tax-free cash. You can get up to 55%* of its value. It also ensures you have access to that cash whenever you want it. Youll maintain ownership and control of your home without the obligation to make regular mortgage payments until you move or sell.
Long Island Estate Slips Away
Darrell Emile moved in to care for his ailing mother, Alice, in 2005. Twice they met with a HUD counselor while contemplating a reverse mortgage on the Freeport, New York, home.
Emile said they were assured that after his mother died, he would have at least six months to select a payoff option and remain in the home, plus two three-month extensions if needed.
That assurance follows a 6/3/3 guideline from HUD, which expects loan servicers to inform survivors and heirs of their options and clear the loan within six months of a death. That guideline does not bar a foreclosure during that time.
When Alice died in 2009, Emile knew he wanted to keep living in the bi-level ranch home his family had owned since 1965. Property values had plummeted in the wake of the recession,making an immediate sale unappealing.
He planned to pay the mortgages balance back with cash. In 2009, that balance was roughly $144,000, and the home was worth about $325,000.
Emile was meticulous: He notified Bank of America on the first business day after his mothers death and asked about his options. Letters quickly started arriving addressed to the estate of his mother, according to copies provided to USA TODAY.
10 questions to ask about reverse mortgages
Experts suggest seniors and their family members have an open discussion about these topics before they apply for a reverse mortgage. Here is a downloadable guide to help start those conversations.
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