More seniors are turning to a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, to help them through their retirement years. However, many adult children are concerned about what happens when their parents die and how the loan will be handled.
A commonly asked question is whether their parents will still be able to leave them the home. The answer is yes. Borrowers can still leave the family home to their heirs. The heirs have the option of keeping the home and paying off the loan, or selling the home to pay off the loan.
After your parents pass away, the heirs will receive a letter from the loan servicer explaining the guidelines. The heirs must notify the servicer as to what they intend to do with the property. A reverse mortgage technically becomes due and payable once the borrower dies. Therefore, it’s important to keep communication open with the loan servicer and answer any questions they may have. This will ensure the process keeps moving forward, and will help prevent the loan from going into default.
If you want to keep the home, then you’ll need to either pay off the loan or refinance the home through a traditional mortgage. You are probably wondering what happens if the property is worth less than the loan and how this will affect your assets. One plus to a reverse mortgage is that you won’t owe more than 95% of the home’s appraised value, even if the loan balance is more than that. HECM’s are “non-recourse” loans. Therefore, if you sell the home to repay the loan, you will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home will be used to repay the debt. Basically, this means that if the value of the home is less than the mortgage balance, you are not responsible for the difference. This is particularly important during recessions when property values have fallen. Furthermore, you will never be required to use your personal assets to pay off the loan.
Let’s look at an example of how this works. Say the home declined in value during the housing slump, and the loan now exceeds the home’s appraised value – the home is appraised for $100,000, but the loan balance is $200,000. To KEEP the home, you will need to pay $95,000 (95% of the $100,000 current market value). You do NOT have to pay the full balance; the Federal Housing Administration (FHA) Mortgage Insurance covers the remaining loan amount. If you decide to sell the home, all loan proceeds will go towards paying off the loan. In this scenario there would be no remaining equity for the heirs. The FHA Mortgage Insurance will then pay for any shortfall, as long as the home sells for at least 95% of the current appraised value.
If the opposite were true, and the home increased in value beyond the balance of the loan, then after the home is sold any remaining equity goes to the heirs.
If you don’t want the home, you have a couple options. Within 30 days of notification, the lender will send an FHA appraiser to determine the home’s current market value. You have 60 days to sell the home or forfeit without penalty. You can request two 90-day extensions with the lender and another two 90-day extensions with FHA. To receive the full 12 month (1 year) extension, you must show evidence that you are actively trying to sell the house, such as providing a listing document or sales contract.
If there is no potential equity, you may decide to simply hand the keys to the lender and avoid the hassle of trying to sell the home. Known as “Deed in lieu of foreclosure,” you will need to sign the deed over to the lender, forfeiting any possible remaining equity. You are however; protected by the FHA Mortgage Insurance to not owe any remaining debt if the home cannot be sold for the amount of the loan balance in the foreclosure sale.
If you’d like to learn more about a reverse mortgage and how it could help your parents, please use our Reverse Mortgage Calculator or call us at 800.215.1415.