When a person passes away, the heirs must decide if they want to sell the house or convey it to an heir.
With a regular mortgage, heirs have three options:
- Keep paying the mortgage of the deceased person until an heir assumes the loan
- Sell the house to a third person
- Let the house go through foreclosure
When the deceased had a reverse mortgage, the options are the same with the exception that there are no mortgage payments to keep up with. The person simply must tell the lender if they are selling the house, buying it themselves from the estate, or letting it go to foreclosure. Heirs normally have about a year to sell the house. If the house still has some equity, most heirs would sell the house and split the net proceeds. If there is no equity, most heirs let the house get foreclosed because it doesn’t hurt anyone’s credit and avoids the hassle of trying to sell a house.
Have you ever been the executor of an estate? Reverse mortgages actually make it easier in this situation. Realtors who worry about reverse mortgage purchases can feel comfortable working with Origin Title & Escrow because they have closed over 1,100 reverse mortgages.
Regular mortgages require the borrower to be personally responsible for the note. If the borrower is in default, the bank will foreclose on the property and sell it to recoup the loan amount. If the bank sells the house for less than the amount due on the loan, the bank can file for a deficiency against the borrower for the rest of the money that is owed. It’s rare, but it does happen.
In a reverse mortgage, the lender can ONLY foreclose on the house. They may not pursue the borrower for any outstanding loan amount because a reverse mortgage is a non-recourse loan. Even if the house is worth less than the mortgage amount, the lender is unable to get any money from the borrower or the borrower’s estate.
In a situation where a homeowner has passed away leaving a reverse mortgage, heirs must either sell the house to a third person, payoff the loan and buy it themselves, or let the house go through foreclosure. If the house still has some equity, most heirs would sell the house and split the net proceeds. If there is no equity, most heirs let the house get foreclosed because it doesn’t hurt anyone’s credit and avoids the hassle of trying to sell a house. In summary, reverse mortgages actually make it easier in this case.
Situations like these are discussed at closing. Reverse mortgage lenders want a closing attorney with reverse mortgage experience to handle these closings, so that all questions can be answered on the spot.
When a borrower seeks a reverse mortgage, they are still getting a loan that uses the house as collateral. Instead of making payments toward paying off the loan, they receive distributions (like a line of credit) from the lender.
If a lender goes out of business and is unable to service the loan – and is therefore unable to make those distributions to the borrower – what happens? Is the house considered an asset for the defunct lender and can it be sold right out from under the borrower?
No – that will not happen, and here is why. When a borrower gets a reverse mortgage, they sign two Security Deeds (that’s what most borrowers consider the “mortgage”) – one to the lender, and then one to HUD, the US Department of Housing and Urban Development. With reverse mortgages, the lender must have cash to service the loan because they are likely obligated to make monthly payments or provide a line of credit to the borrower. If the lender fails, FHA insures those obligations, so the house will not be lost.
Loan officers who have access to reverse mortgage products would benefit from working with a residential loan closing attorney who thoroughly understands the way the programs are structured and can explain everything to borrowers in a way they will understand.
Reverse mortgage loans do not require an escrow account, because the borrower receives money, rather than making payments. Since conventional mortgages are usually set up to include property tax and homeowner’s insurance, how does the reverse mortgage loan holder pay for those elements? The borrower acquires and pays for insurance independently, and pays taxes directly to the tax authority.
On-time payment is essential, because if the borrower has paid property taxes late within the last three years, the lender will likely require a LESA account — a Life Expectancy Set-Aside account, which sets aside enough money to pay the property taxes every year of the remaining expected lifetime. Taxes and insurance payments must be paid on time after closing as well. Failure to pay taxes and insurance is considered in default for reverse mortgages and can result in foreclosure.
Does the LESA account really impact the borrower? It can be a big number if the borrower is younger: in 2015, the lender required a $73,000 LESA account deposit for a 62-year old, city of Decatur borrower.
Loan officers and reverse mortgage specialists enjoy working with a closing attorney who can explain the rules, requirements, jargon and singularities in reverse mortgages to homeowners.
A reverse mortgage allows the 62+ year-old homeowner to refinance their home and receive the equity as a line of credit or a payout directly to them. Its purpose is to give seniors a chance to use the equity in their homes to help with living expenses, and it closely resembles a home-equity loan.
And it is a loan – it accrues interest and it must be paid off upon death or when the homeowner isn’t able to live in the home any longer. It could be tempting to think of taking that lump sum and investing it, but that is contrary to the intended purpose of the loan. The homeowner will likely lose access to the money, and wouldn’t be able to use it to supplement their living income.
In 2006, a few unethical lenders working with equally unethical financial advisors were caught taking advantage of seniors, forcing them to invest in specific ways. The Housing and Economic Recovery Act of 2008 made it illegal for reverse mortgage lenders to be affiliated with other financial or insurance products.
Loan officers who don’t have a lot of experience with reverse mortgages would be wise to talk with a closing attorney who does, so they will understand what borrowers can legally do with the money they receive.
Reverse mortgages have been around since the late 1980’s. Almost all reverse mortgages are FHA insured and follow strict guidelines. The program was designed to keep seniors in their house as long as possible and to make the equity in the house available without selling it. There is a lot of mis-information on reverse mortgages. First, the lender does not take the house after a certain number of years. The lender may foreclose only if the borrower has moved out of the house, passed away, failed to pay taxes and insurance premiums, gone twelve consecutive months without living in the house, or has conveyed in interest in the property to another person or entity. (If there are two borrowers, both must move out of the house or pass away before a lender can foreclose).
FHA recently changed some of the guidelines for disbursing funds. Perhaps the most noticeable new rule is that the borrower may only receive sixty percent of the value of the house at closing in the first year of the reverse mortgage. After the first year, the rest of the funds may be accessed. FHA is currently proposing other changes, most notably that the borrower must be able to show an ability to pay the property taxes and insurance on the property.
A reverse mortgage closing is a little different than a forward mortgage. First, there will be two Promissory Notes and two Security Deeds. Unlike forward mortgages, lenders in a reverse mortgage must be able to make the payments or keep funds available in a line of credit for the borrower. If a lender fails and goes out of business, HUD steps in to make sure those funds will continue to be available to the borrower. The lender on the second Note and Security Deed is the Department of Housing and Urban Development because they will fulfill any of the lender’s obligations if the original lender is unable to. Second, the disclosures are much different because there are no payments being made by the borrower. Reverse mortgages may not be for everyone, but be sure to get information from credible sources prior to making a decision. The reverse mortgage might be an ideal solution for a lot of homeowners over the age of 62.