I'm constantly hearing from heirs of reverse mortgage holders who are wondering what they should do now that the last borrower on the loan has passed or had to move to assisted living. Many heirs have no idea what their options or obligations are or how long they must do them.
If you have a reverse mortgage or have a family member who has a reverse mortgage, you need to arm yourself with this information. Even if you or your relative is not ready to move out of their reverse mortgaged property now, this can save you or your family a lot of grief later.
Do These Things Now Before the Borrower Leaves the Home
The loan becomes due and payable when the last original borrower permanently leaves the property. There are a lot of things you can do before the mortgage holder leaves the home to help make the process smoother later.
Most people are not aware that the lender has restrictions — the lender cannot deal with anyone who is not authorized to speak with the lender on the borrowers’ behalf due to financial privacy laws. Reverse mortgage borrowers should contact their lender as soon as they know who will be settling their affairs, give the lender written authorization to communicate with their heirs on all things relating to the loan and authorize them to act on all things relating to the loan. Borrowers can add anyone to the title at any time without affecting the loan if at least one of the original borrowers also remains on the title. You may also wish to consider a family trust on which your heirs are successor trustees.
Check with your estate attorney, but if your heir is already on the title before you pass or it becomes a matter of a trust change and not a probation, you may be able to eliminate a huge delay for them when settling the property. It may still require a probation action, but your attorney will advise you on that. Your heirs cannot sell or take out a new loan unless they hold title to the home.
Reverse mortgage borrowers should also make sure that your heirs know where you keep your reverse mortgage statements. They will need to access them later.
Heirs Should Act Deliberately But Without Delay
Once the time comes that the last borrower has left the home and the heirs must make a decision to keep the home, sell it or let the lender take it back, the heirs need to be able to do so quickly so that excessive interest and fees do not add up and they do not risk foreclosure (assuming they do not intend to surrender the home to the lender). Interest accrues the entire time the loan remains outstanding, so the balance keeps rising during this time. If the lender begins foreclosure, that action adds additional costs to the payoff should the heirs decide to keep or sell the home.
The best initial step is for heirs to take the most recent reverse mortgage statement the borrower received from the lender and review the outstanding balance on the statement (hence why we talked about knowing how to access them). Contact a local real estate professional and determine from local sales of similar homes the most probable selling price of the home.
If there is still equity in the home, it would be in the heirs’ best interests to sell the home or keep the home. But heirs can only immediately sell the home or begin the process to place a new loan on the property if they hold the title.
What If The Heirs Want to Keep the Home?
If the heirs want to keep the home (with or without equity), they must decide to repay the reverse mortgage. This probably will require a new loan to repay the existing loan, unless they have the cash available.
To place a new loan on the property or to sell it, the heirs will still need to have the title transferred into their own names if that was not resolved previously. Remember, under the reverse mortgage, heirs can choose to repay the loan at the amount owed or 95% of the current value, whichever is less. If the heirs want to keep the home, they will never have to repay more than 95% of the value of the home regardless of the loan balance.
If the heirs do not wish to keep the home, they can choose to walk away from the home, and the lender can look to neither the heirs nor the estate to repay the obligation — just the property. The lender would take the property by foreclosure, or the heirs could deed the property back to the lender in lieu of foreclosure. (There are no bad credit implications whatsoever to heirs for such an action.) If heirs choose to let the lender take the home at this point, this is a choice they can freely make, but not one they have to make out of desperation.
By having the authorization granted, the title cleared and the heirs ready to act quickly and knowledgably when needed, heirs are not frustrated or overwhelmed when the time comes that they must act. All the roadblocks can be removed in advance so that heirs can make an unhurried decision, free from the pressures of a looming foreclosure. The effects of advance planning can mean not only peace of mind, but also savings of thousands of dollars in unnecessary fees due to delays and foreclosure actions.
POST WRITTEN BY Michael G. Branson (CEO of All Reverse Mortgage Inc.) for the Forbes Real Estate Council. Click here to read more.