Reverse Mortgages and Estate Planning: Avoiding “Unaware Heirs”
(Note: the guidelines mentioned in this article only apply to HUD-administered Home Equity Conversion Mortgages, or HECMs. These reverse mortgages comprise the majority of available programs today.)
Reverse mortgages provide financial solutions for homeowners aged 62 and above, but prospective borrowers also need to consider their heirs and estate planning. Reverse mortgage heirs may need to quickly satisfy reverse mortgage debt according to reverse mortgage guidelines. Here is how a reverse mortgage can affect estate planning and heirs.
Reverse Mortgage Heirs and Occupancy Requirements
According to the U.S. Department of Housing and Urban Development (HUD), its regulations require owner occupancy of homes financed with HECMs. When all borrowers have left a mortgaged home, the reverse mortgage becomes due and payable. Heirs may need to refinance or sell the property to pay off the reverse mortgage, or the lender may foreclose and sell the property. Family members and friends living on the premises are considered "tenants," not owners, and may be required to vacate the mortgaged home. Strict owner-occupancy requirements require lenders to verify owner / surviving spouse occupancy annually.
Guidelines for Surviving Non-borrowing Spouses
Effective with FHA case numbers issued on or after August 4, 2014, HUD regulations allow qualified non-borrowing spouses of deceased reverse mortgage borrowers to continue occupying their homes after the death of a borrowing spouse. HUD eligibility requirements for surviving non-borrowing spouses include:
- A non-borrowing spouse must have been married to the reverse mortgage borrower when the mortgage was originated and for the duration of the borrowing spouse's life.
- A non-borrowing spouse must be identified in the reverse mortgage loan documents.
- Non-borrowing spouses must provide proof that they are legally entitled to occupy the home.
- Payouts cease upon the death of the last borrower; the reverse mortgage cannot be assumed by a non-borrowing spouse.
For complete information on HUD requirements for deferrals of due and payable status on an FHA reverse mortgage, borrowers can contact their mortgage servicing companies or HUD-approved reverse mortgage counseling agencies.
Concerns for Reverse Mortgage Heirs
Once the reverse mortgage lender learns of the borrower's death (lenders subscribe to databases that provide this information) it sends a HUD-approved appraiser to determine the market value of the home. Usually the heirs' course of action depends on the reverse mortgage balance and the value of the property.
Heirs get six months to make a decision about paying off the loan, but it's smart to decide and act quickly. As long as the loan remains unpaid, interest on the balance and monthly insurance premiums are added to its balance, reducing the heirs' equity.
Here are the most common options when the HECM balance is less than the property value:
- Sell the home, pay off the reverse mortgage and keep the remaining proceeds
- Refinance the home with a traditional "forward" mortgage
- Pay off the reverse mortgage with cash (some reverse mortgage borrowers even take out life insurance policies to pay off the HECM for their heirs)
If the HECM balance exceeds the property value, the heirs can:
- Let the lender know they don't want the property (the lender will sell it and collect any shortfall from the mortgage insurance (HECMs are backed by the FHA, which insures the loans)
- Purchase the property for 95 percent of its appraised value.
Because there is no equity, heirs often simply hand the keys to the lender and avoid the hassle of selling. This is called a "deed in lieu of foreclosure," but unlike ordinary foreclosures, this one does not affect the heirs' credit rating.
Heirs trying to sell or finance the property can request up to two 90-day extensions. Extensions are only granted, however, if the heirs can prove that they are arranging the financing to keep the residence or are actively marketing the property.