Reverse Mortgage Holders May Leave Family to Inherit Debt

Reverse MortgageReverse mortgages are loans that are intended to help elderly people stay in their homes. But when the borrower dies the loan becomes due, and the family members of the reverse mortgage holder may inherit nothing but debt.

Under the terms of a reverse mortgage, a property owner gets access to the equity they have in the home that is their primary residence. The bank makes mortgage payments to the owner, which now makes the house a source of income. Since the owner does not have to make payments on the loan it sounds like a good deal. But many people are finding that a reverse mortgage may not be as good as it looks.

A reverse mortgage loan does not have to be paid back until the borrower dies or moves out, at which time the home is intended to be sold, with the proceeds of the sale going to pay off the loan balance, plus any fees and interest that have accrued. If there is anything left it goes either to the borrower or the heirs. If the house sells for less than the balance of the loan, the lender and/or their federal insurance absorbs the loss.

TV commercials describe reverse mortgages as safe and effective, government-insured, tax-free cash. What the commercials neglect to mention is that people with reverse mortgages are starting to get into trouble. According to the Consumer Financial Protection Bureau, about 9.4 percent of reverse mortgage loans defaulted in 2012. About 13 percent of outstanding reverse mortgages are on properties that are worth less than the balance on the loan. And 61 percent of the borrowers that are in trouble are in repayment plans.

Fees on reverse mortgages may be high. Since it is a loan that typically is not based on income or credit scores there are risks to the lender that they compensate for with high loan origination fees and other charges.

In addition, the interest rate on a reverse mortgage may be higher than on a regular home equity loan. After interest and fees, the borrower may end up with not as much money out of the loan as expected. Also, the homeowner is still responsible for home costs such as property taxes, homeowners insurance, and maintenance. If they are unable to pay these costs they default and the bank can foreclose.

Homeowners that want to leave their home to family when they die are setting their heirs up for debt with a reverse mortgage. Once the borrower dies, lump sum repayment of either 95 percent of the home’s current market value, or the total remaining balance of the reverse mortgage loan, whichever is less, comes due.

Heirs that cannot make the payment are threatened with foreclosure. If a surviving spouse was not listed on the loan they are in the same situation, having to pay or move out.

Reverse Mortgage
Reverse mortgages are loans that are intended to help elderly people stay in their homes. But when the borrower dies the loan becomes due, and the family members of the reverse mortgage holder may inherit nothing but debt.

The 95 percent rule can be a critical difference in enabling a survivor to keep the family home, particularly if the home is upside down, with the current value of the home less than total balance owing on the reverse mortgage. But lenders expect homeowners and heirs to know the rules, and may not explain them. Some unscrupulous lenders ignore the rules and threaten foreclosure if the full balance of the loan is not paid off.

A situation that a borrower may not consider is that the reverse mortgage needs to be repaid when they move out, and they do not have to die to trigger loan settlement. The reverse mortgage borrower has to live in the home as their primary residence. If they have not lived there for a year they are considered to be moved out. This can happen if a homeowner can no longer stay in their home and, for example, have to enter a long-term care facility, meaning they have to pay at a time when money is probably already tight.

Federal Regulations on reverse mortgages are administered by the Department of Housing and Urban Development. They apply to reverse mortgages that are insured by the Federal Housing Administration, which is almost all of them. Rules say that lenders must give heirs up to 30 days from when loan becomes due to figure out what they want to do with the property, and at least six months to arrange financing.

AARP says to consider carefully before getting a reverse mortgage, evaluating the risks of high costs along with problems that can occur when the borrower wants to (or has to) move out, and that may make the loan more trouble than it is worth.

Borrowers also should consider whether they can afford to use up their home equity at this time in their lives, leaving less for later when it might be needed more. And not forgetting the big consideration of whether taking out a reverse mortgage will allow the borrower to leave their family to inherit anything more than debt.

By Beth A. Balen

Sources:
The BostonGlobe
US News
AARP
AARP
Federal Trade Commission

6 Responses to "Reverse Mortgage Holders May Leave Family to Inherit Debt"

  1. tammi backu   December 20, 2014 at 7:49 am

    alll i know is we lost the family home did not recieve the six monthes to arange financing they serve forclourser papers in three months keep us busy trying to find housing in short time and we suck our life savig into remolding the home which we livrd in for 15 yrs finanical freedom stole our home and took it back by their rules not the law nothing was legal about they are no more the theifs in the night stocking and praying on the elders

    Reply
  2. wewa   July 17, 2014 at 1:46 am

    There is nothing wrong with this article. This is one side of a real possibility.
    You reverse mortgage banking industry people need to face the facts that this is the pitfalls and possible drawbacks of what can and does happen to heirs.
    I know this for a fact. None of you probably do. Just salespeople not caring what happens to your clients after your deal is done.

    Reply
  3. Colette Gray   April 2, 2014 at 4:22 pm

    Beth, honestly, you are hurting seniors by implying their children get stuck for a bill with a reverse mortgage. Surely you did not intend to indicate that seniors should live in poverty in order to subsidize their sons’ and daughters’ lifestyles. An inheritance is typically what’s left over once the senior homeowner has lived the way they had planned all the many years they scrimped and saved to be able to take care of themselves for the rest of their life. Please don’t encourage the erroneous notion that children are entitled to anything more than what’s left over once a senior is done with worldly possessions.

    Children of parents who have taken a reverse mortgage often still receive an inheritance. If they want the home for themselves, let them buy it back from the lender.

    Your article was based on opinion, not facts, and as someone in the industry I resent you putting forth such bad information.

    Reply
  4. J Szallai   April 2, 2014 at 9:45 am

    Beth, What are your qualifications to write an article on this subject matter? It is very misleading, biased and full of inaccuracies. Did you know that any type of mortgage or home equity loan on a property needs to be repaid on sale or when the borrower no longer occupies the residence, not just reverse mortgages.

    Reply
  5. Rick Sweeney   April 2, 2014 at 7:27 am

    This is so sad (and almost completely wrong). Misinformation like this could cause people to lose their homes. What a disservice. How about a correction?

    Reply
  6. Warren McKay   April 2, 2014 at 6:18 am

    Beth, you need either complete your research accurately or report factually.
    Your article is riddled with incorrect material and slanted presentation.

    Reply

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