Reversing the Reverse Mortgage

Reverse mortgages are available to borrowers who are 62 or older and who have paid off most or all of their mortgage. Borrowers are able to borrow 50% or more of their home equity, up to a maximum loan amount of $625,000.00. There is even a lender currently offering jumbo reverse mortgages of 40% with a loan max of $2.5 million in California, New Jersey and Hawaii.

Borrowers don’t have to pay back principal or interest until their home is sold or the last surviving borrower dies. Many seniors use a reverse mortgage to pay for home-health care. This allows them to age “in place” and put their money in income-producing investments.

But……when the last borrower living in the property dies, strict and alarming deadlines spring up. The loan servicer is required to send a letter stating that the balance of the loan is due. The heir or estate administrator has only 30 days to respond with a statement of intent – either to sell the home, or to repay the debt.

If no response is received by the loan servicer, then the house is posted for foreclosure.

Reverse mortgages are non-recourse, so even if the sales price or the price received at foreclosure is less than the loan amount, the probate estate is not liable for the difference.

The FHA has provisions that allow the lender to provide extensions of time for up to a year. Sometimes an executor can finagle a longer time, as long as the lender agrees and there is a good excuse.

Of note – in August, the rules were relaxed to allow a spouse (even one under 62) who isn’t a borrower to stay in the home after the borrower dies. However, the spouse won’t receive further monthly payments of home equity, and interest on the loan continues to accrue. When the spouse moves out, the deadline clock starts ticking again.

If you have a reverse mortgage, talk to your heirs and your executor about the details. This is one surprise they don’t need to receive.