Death and Reverse Mortgages

Borrowing, Home Equity Loans & Line Of Credit

A reverse mortgage is an increasingly popular way for older Americans to acquire funds based on the equity in their homes. You must be at least 62 years old, use the home as your primary residence, and have at least 50% equity in it to qualify for a reverse mortgage. You are also required to maintain the home and pay all property taxes, homeowner’s association dues, and all insurance premiums that apply to the property.

Follow those rules, and you can tap into your home’s equity without the need for repayment until you decide to sell the home, move out permanently, or pass away. At that time, the loan is due in full along with any accrued interest. Typically, the home is sold to repay the loan after your death. This often leaves heirs with little or no inheritance value from the home (but since you are dead, that is not your problem). Importantly, if your home is underwater (you owe more on it than it is worth), you are not responsible for making up the difference.

The vast majority of reverse mortgages are acquired through the Home Equity Conversion Mortgage (HECM) program, backed by the government through the FHA under rules established by HUD.

Historically, a reverse mortgage does not automatically transfer to a surviving spouse. Thus, some unsuspecting spouses have received the double whammy of not only losing their spouse, but also losing their home unless they paid the outstanding loan amount plus interest in a lump sum.

Traditionally, the way around this has been to make sure both you and your spouse are co-owners of the home (listed as such on the title) and that you are both co-borrowers on the reverse mortgage. Under those circumstances, the death of one spouse does not bring the loan due; it continues under the surviving spouse.

Unfortunately, one of the factors determining how much of a loan you qualify for is the age of the youngest borrower. In the past, some older Americans were given the risky advice to change the title on their home to single ownership of the older spouse and list the older spouse as the single borrower on the reverse mortgage. This allowed couples to either increase the amount of their loan or qualify in the first place (if one spouse was under age 62).

In some cases, it was either not made clear to the couples that the loan would be due upon the death of the older borrowing spouse, or the situation was outright misrepresented. This often left surviving spouses in dire financial straits.

However, that situation is about to change. In September of 2013, a district court ruled in Bennett et al. v. Donovan that lender’s requirements to demand immediate repayment from surviving spouses violated Federal Law. HUD was directed to fix the problem, and did so with changes announced in April 2014 and taking effect on August 4th.

Reverse mortgages issued after that date will allow the non-borrowing spouse to stay in the home and defer loan repayment as long as they follow the previous rules on maintenance, taxes, and insurance and meet three conditions:

  1. The borrowing and non-borrowing spouses are married at the time of the loan closing, the spousal status is disclosed at loan closing, and the spouses remain married to each other through the borrowing spouse’s lifetime.
  2. The non-borrowing spouse is noted as such in the loan documentation.
  3. Legal ownership of the home is established within 90 days after the borrowing spouse’s death.

For those who already have reverse mortgages, the old rules still apply… for now. There is a separate pending lawsuit addressing that issue.

While reverse mortgages now have greater protection, consider more conventional loans or other income methods first, and at the very least, put off a reverse mortgage for as long as you can. For if you apply at age 62, you stand a decent chance of outliving the equity in your home. Additionally, reverse mortgages impose higher fees than other forms of equity-based borrowing, such as a HELOC (Home Equity Line of Credit). With that in mind, consider all of your choices before assuming a reverse mortgage is your best option, no matter what The Fonz says.

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