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Many people that have a reverse mortgage always ask the question what are the rights and responsibilities my children or heirs have regarding the reverse mortgage upon their passing on. Many people that are retired have obtained these loans are concerned that their heirs will be saddled with the responsibility of a loan that they either do not want or want to keep the home in the family. What follows is a brief overview of what the heir’s legal rights and responsibilities are. In providing this overview, I urge you to consult with the loan officer at 7th Level Mortgage for more precise information because everyone’s situation and circumstances are different.
- The first option is to obtain their financing, pay off the loan and retain the property themselves. Keep in mind, the person or persons will have to qualify for the loan themselves. What that means is that they have to meet all the requirements of the loan including LTV, DTI, Credit, and Employment. Many people will select this option, especially if they have children and want to raise them in the home and keep the property in the family. If there is sufficient equity in the home and they want to take out some of the equity in the form of cash they can pay off other debt and/or improve the home. One critical factor to keep in mind is that the non-borrowing surviving spouse will have interest in the property before any other heirs can lay claim to the property. Additionally, the equity position must be strong enough for a lender to provide a forward mortgage if the person inheriting the property is obtaining financing on their own.
- The second option is to sell the house, pay off the loan and retain whatever monies are leftover. In the case of a home equity conversion loan, this option may make the most sense because any remaining principal amount and interest will only accrue month to month. FHA regulations are such that something must be done with the property to either sell off the property or pay off the HECM within six months. The loan officers at 7th Level Mortgage have been trained on these loans and can best explain all the nuances of structuring a new loan for you. The recommendation when one applies for a reverse mortgage is that both spouses or long-term partners be listed on the application as borrower and co-borrower. Essentially, this will prevent the surviving spouse burdened with a mortgage payment when most of these borrowers are living on fixed incomes.
- The third option is to deed the home to the lender. As people age, the chances are that they may, due to medical conditions or other health issues, move to a nursing home or other long-term health care facility. Where these loans can be problematic is if the non-borrowing spouse wants to retain and live in the home if the borrower dies. The following conditions must be met for a non-borrowing spouse to stay in the property:
1) They must be married to the reverse mortgage borrower at the time the loan was issued.
I urge you to check your particular state’s rules regarding probate and any other issues that can arise in the event, the borrowing spouse dies.
2) The non-borrowing party MUST be listed as the spouse on the HECM documents.
3) If living, the borrower must certify that there is an eligible non-borrowing spouse. In the event the the borrower has passed on, the reverse mortgage will not need to be paid until the non-borrowing spouse has passed on or until the person has moved out.
To prevent issues from arising, I recommend you take the following steps:
- Getting a will: You will want one in place before taking out the reverse mortgage. This will ensure that your wishes as to all of your assets and liabilities are transferred to the right person.
- Up to Date Records: There is nothing worse than having outdated or old information. This includes bank accounts and a paper trail as to what monies were used from the reverse mortgage and how they were used.
Finally, your will can specify who will be responsible for administering your assets including the home, and how the remaining monies left after the mortgage has been paid will be disbursed. If you want to sell the home to your children, the loan proceeds can be used to pay off the loan. Once the sale is completed, your children can rent the home back to you. I urge you to consult with an attorney to set this up so gift tax issues do not become problematic. You can also use the cash value in a life insurance policy or other investment to pay off the loan. The loan officers at 7th Level Mortgage can help explain these options, and the benefits of each, so you can make a wise choice in terms of your estate planning.