Reverse mortgages give older homeowners income by tapping into their home’s equity. But when the homeowner dies, heirs must act fast or they’ll risk foreclosure.
The vast majority of reverse mortgages are home-equity conversion mortgages insured by the Federal Housing Administration (FHA). Borrowers are allowed to tap into 50% or more of their home equity up to a maximum loan amount of $625,500. However, the FHA has stringent repayment rules that lenders must follow upon the death of the last mortgage-holder on the note.
Reverse-mortgage borrowers must be 62 or older and have paid off most or all of their mortgage. Borrowers don’t need to pay back principal or interest until the home is sold or the homeowner dies.
When the last remaining borrower living in the property dies, the FHA requires loan servicers to send a letter stating that the balance of the loan is due. The heir or estate administrator is then given 30 days to state whether the loan will be repaid or the home sold. If a response doesn’t come within that time period, foreclosure proceedings may be initiated.
That letter may sound intimidating, but the key is to respond with a clear statement of intent—whether the loan will be repaid by estate, if heirs plan to refinance with a regular mortgage or if the home will be sold to repay the loan, says Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association (NRMLA), an industry trade group. If a response is received, the FHA has built-in provisions for lenders to provide extensions of time up to a year for the estate to take these actions, he adds.
If an estate has extenuating circumstances that delay repayment, it is especially important to contact the lender and explain, says Diane Masucci, a reverse-mortgage specialist with San Diego-based Security One Lending.
In August, the FHA relaxed rules to allow a spouse, even if under age 62, who isn’t a borrower on the reverse mortgage to remain in the home as long as he or she wants. The spouse won’t receive monthly payments of home equity, however, and interest will continue to accrue. But there is no lender deadline or foreclosure, Ms. Masucci says.
Affluent seniors use reverse mortgages to pay for expensive home health care, allowing them to age in place while keeping their money invested in higher-yield securities, says Ronald J. Chin, partner with Coronado, Calif.-based Rose Mumms & Chin, an estate-planning law firm.
If an estate has extenuating circumstances that delay repayment, it is especially important to contact the lender and explain.
“We’ve had very liberal cooperation from all the lenders we’ve used, allowing us ample time to accurately market property so we can sell it at the highest price,” Mr. Chin says. He provides lenders with listings and other proof that the estate is actively working to sell the house as quickly as possible and repay the loan.
Pre-recession, a number of lenders offered “jumbo” reverse mortgages that allowed high-end homeowners to tap into more of their equity. The only current reverse-jumbo lender is Tulsa, Okla.-based Urban Financial of America, which introduced a reverse-jumbo product that lends up to 40% of home equity with a maximum loan amount of $2.5 million in three states—California, New Jersey and Hawaii.
Urban Financial plans to expand the product to more states in 2015, but the lender doesn’t expect to be alone for long in the reverse-jumbo space. “I would be shocked if there aren’t any other product offerings in the market by next spring,” says Steve McClellan, president and CEO of Urban Financial.
Like jumbo mortgages, reverse jumbos aren’t government insured. So they are not subject to the FHA timetable for payback, allowing more flexibility to work with more complex estates, Mr. McClellan says. However, borrowers should ask about jumbo-loan payback time limits and foreclosure policies, he adds.
The reverse-mortgage market in the U.S. has remained roughly even at about 60,000 loans annually for the past five years, according to NRMLA. But with home values rebounding, seniors age 62 and older have more equity in their homes than at any time since early 2008. Collective home equity for that age group was $3.73 trillion, up 22% since spring 2012. Of that equity, 77% is paid off and potentially borrowable via a reverse mortgage, NRMLA data indicate.
More tips on avoiding reverse-mortgage surprises:
• Talk to heirs in advance. Review repayment rules with your spouse, children or other heirs. “Obviously in the ideal relationship, children are self-sufficient and open and supportive of parents’ financial decisions, but in reality that’s not always the case,” Mr. Bell says.
• Check home values. In most cases, the home’s sale price will exceed the loan amount, Mr. Bell says. Reverse mortgages are non-recourse loans, which means that if the house does sell for less, an heir is never responsible for the difference, Ms. Masucci says.
• Rates accrue. Until the loan amount is paid off, interest will continue to accrue. On the other hand, the estate now gets a sizable mortgage-interest deduction on its tax return
Source: By: Anya Martin - The Wall Street Journal
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