If you are the borrower of a reverse mortgage loan or are considering applying for one, you are probably curious about the rules and requirements for this type of loan. Reverse mortgage rules can be complicated, but we’re here to simplify them for you– so you can feel confident in your decision.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan that gives older homeowners the chance to access the equity in their home while still living there. This is an advantage because home equity is typically only available once you sell your home or borrow against it using a line of credit.
A common reason to use a reverse mortgage is if most of your wealth is tied up in your home equity and you have no other way to afford your living expenses. A reverse mortgage allows you to remain in your home as long as you continue to pay your property taxes and homeowners insurance.
The two major benefits of taking out a reverse mortgage on your home are:
- Immediate income: A reverse mortgage loan converts your home equity into income you can receive as cash payments in a lump sum or installments.
- No more mortgage payments: A traditional mortgage loan requires a monthly payment to your lender. With a reverse mortgage: the lender pays you monthly, not the other way around.
Eligibility Requirements for a Reverse Mortgage
To be approved for a reverse mortgage loan, the following requirements must be met:
- You have to be at least 62 years old
- The house must be your primary residence
- You must have significant equity in the home (at least 50%) or own it outright
- You must be able to prove you are financially capable of fulfilling the loan obligations
Keep in mind that you are still responsible for paying your property taxes, homeowners insurance, and keeping up with maintenance when you take out a reverse mortgage loan. If you don’t, your lender may cancel your loan, putting you in a tricky situation that could result in the loss of your home.
Who Is Responsible for Reverse Mortgage After Death?
You might be wondering what happens to your reverse mortgage after death. Once the borrower of a reverse mortgage passes away, the loan balance becomes due and payable. When that happens, the heirs must decide how to handle the property. Their options include:
- Repaying the loan balance and keeping the property
- Selling the home and inheriting any remaining equity
- Letting the lender foreclose on the property
If you are upside down on your reverse mortgage loan (meaning you owe more than the house is worth), your heirs are not responsible for making up for that shortfall. In this case, the best option would likely be a deed-in-lieu of foreclosure. A deed-in-lieu is a process your heirs can use to sign the property back over to the lender to avoid a drawn-out foreclosure process. This process will not negatively impact your heirs’ credit scores and is often the quickest option.
How Long Do You Have to Pay Off a Reverse Mortgage After Death?
When the borrower of a reverse mortgage loan dies, the heirs of the property must act quickly to avoid foreclosure. Within 30 days of the borrower’s death, the lender will mail out a “Due and Payable” notice–which the heirs will then have 30 days to respond to with their plan for the home– buy it, sell it, or turn it over to the lender.
The bank has the right to seize the home six months after the borrower’s date of death–unless the heirs pay off the loan. Your heirs will have to pay the total loan balance or 95% of the property’s appraised value–whichever is less.
If the heirs need more time to figure out financing, they can ask the lender for a 90-day extension. The extension can be used twice–for a total of six months, if necessary. The request must be submitted along with documentation of the heir’s efforts to secure financing or sell the home.
The lender would prefer not to foreclose on the property, as it’s a time-consuming and costly process. However, if the heirs aren’t responsive, the bank has no choice but to foreclose to pay off the reverse mortgage loan balance.
Can a Reverse Mortgage Be Refinanced?
One of the biggest reverse mortgage problems for heirs if they want to keep the home is finding a way to pay off the loan balance. Unfortunately, reverse mortgage loans cannot be refinanced by heirs. In order to keep the house, heirs must pay off the entire loan with cash–a challenge for most people. That leaves selling the home or letting the lender foreclose on it as the remaining options.
What Happens if a Spouse Dies With a Reverse Mortgage?
As the surviving spouse of a reverse mortgage holder, you have special rights that allow you to remain in your home, even if your name wasn’t on the original mortgage loan. As long as you were married to your spouse when the reverse mortgage was first created, you have the right to take over the loan payments and stay in your home.
Be aware that you have to establish your legal right to stay in the home within 90 days after your spouse passes away. If you don’t contact the mortgage holder promptly, you risk losing the right to assume the mortgage and, therefore, risk losing your home. The mortgage company will likely ask for copies of your marriage certificate, will, and your spouse’s death certificate.
Final Thoughts
If you have a reverse mortgage and plan on leaving your house to your children, it’s essential to talk to them about the options they will have once they inherit the property. It’s also a good idea to consult an attorney to make sure you are happy with the plan for your estate.
Next Steps
Are you looking to sell a home with a reverse mortgage fast? We may be able to help! At Pavel Buys Houses, we work with homeowners all over the state of Massachusetts that are looking to sell quickly for a fair cash price. Don’t hesitate to contact us for your fair cash offer or to discuss your options.