What to Do If Your Parent Had or Has a Reverse Mortgage and you are moving them into Senior Care, or they have passed away.
Taking the right actions
Near the end of August, I was walking through a home I will be listing soon for a client. The son of the previous owner stopped by. He said his Mom had obtained a reverse mortgage on the home that the heirs were unaware of. The son would have preferred to keep the home in the family, but the loan balance was more than they felt the home was worth. Then they tried to sell the home to cover the debt amount but received no offers. After I asked a few questions, it turns out that the agent they were working with, did not know what actions to take to help them to either keep the home or to sell it.
LendingTree has a good article on the process called “How to Handle a Reverse Mortgage After Death” https://www.lendingtree.com/home/reverse/reverse-mortgage-after-death. In the lending world, a reverse mortgage is called a HECM. HECM standing for Home Equity Conversion Mortgage. The HECM lender can automatically short sell a HECM loan for 95% of the current appraised value. Had the heirs wanted to keep the home, they could have obtained an appraisal and then paid the lender 95% of the current appraised value to either keep the home or sell it to someone else.
Because they did not know this the heirs thought they only had one choice. They signed a Deed in Lieu where the estate gave the home back to the lender. HECM loans are “nonrecourse” loans meaning the lender cannot look to the heirs for any unpaid balance owed on the mortgage. The Kiplinger Letter’s article also explains how short selling a home with a HECM loan works https://www.kiplinger.com/article/retirement/T021-C000-S004-what-heirs-need-to-know-about-reverse-mortgages.html
What if the physical or medical situation required your parent(s) to move, or simply if you have a HECM loan and you want to move. What then? What to do will depend on your needs and plans. If your parent has a short-term physical need, contact the lender and let them know the mortgagor (your parent) situation and that they plan on moving back into the home. There is a provision for moving out of the home for a short amount of time.
If the mortgagor wants to move out and hold on to the home, then you will need to obtain a new mortgage to pay back the existing mortgage. If the value of the home has increased and is more than the HECM loan amount and if the location is an area with expected values to increase, this may be a good idea. I have also seen owners that paid off their HECM loan then moved and rented out their homes to create a cash flow of income.
Not Your Typical Mortgage
Reverse Mortgages are not the simple fixed-rate mortgage that most people are familiar with. They are more complicated and require more investigation, plus taking time to know your options. The best resource I have found to obtain information about reverse mortgages is www.reverseMortgageGuides.org. This organization has many written guides from which you can obtain information about the pros and cons of a reverse mortgage, plus answer many of your questions.
Reverse mortgages were cash cows for mortgage brokers a few years ago because of the high fees paid to the mortgage origination companies for obtaining a HECM loan. That is why there used to be a lot of advertising about them on TV and radio. About a year ago, the fees paid to the mortgage origination companies was reduced, so the advertising declined. Most lenders were very careful to make sure the borrowers of HECM loans received all the information about the loans and tried to explain all the pros and cons of these loans. Unfortunately, many borrowers do not discuss these loans with their heirs because they feel it is a way of not being a burden on their children or grandchildren.
Considering a Reverse Mortgage?
If you’re considering obtaining a reverse mortgage or if you’re wondering if your parents obtained a reverse mortgage, have a discussion. Get legal and financial advice from professionals because a reverse mortgage is complicated (I think I said that already but wanted to make sure you got the point).
If you want more information about this contact Jim Clifford at 253-826-7513 or email at [email protected]. Jim has over 40 years of experience helping clients and customers sell and buy homes, condos, multifamily and vacant land in Washington.
Read my previous post on Baby Boomers lifestyle habits and their money