My MIL and FIL recently entered a reverse mortgage. House in good shape and worth about $150,000. I expect they will take a large distribution up front as well as withdrawal monthly amounts until they hit the max dictated by the lender. The large distribution up front coupled with fees, closing costs, mortgage insurance and interest build up means that if they continue to live in the house for even 15 years, I expect the loan balance to exceed the value of the home. Glad for the non-recourse nature of the loan, but my husband and I don’t want to touch their house after their death with a 10-foot pole. Hate the idea of being drug into any of the mess that heirs must deal with for no $ benefit. I know we can deed to the lender to avoid foreclosure, but we would like to not even be listed as an heir for the house. Hoping they can list in the will Heirs get asset A B or C, but heirs DO NOT get the house? I know you’re not an attorney but is there a common way for children to divorce themselves from the house entirely while leaving all other transfers of ownership intact? We don’t want the house, need the house and certainly don’t want to unwind our parents’ financial decisions.
I think you are concerned at this point needlessly and you don’t have to do anything. You should consult with an attorney if you are concerned but I think your fears are unfounded. Firstly, your in-laws are the ones signing on the dotted line for the mortgage, not you.
You are never, in any way whatsoever, obligated on the loan. Secondly, the loan has only the property for security.
Therefore, it seems a waste to file anything now above and beyond a trust or will specifically excluding what heirs get because the lender can never seek repayment from any other asset and there is no liability to other assets or heirs.
Reverse mortgages are Non-Recourse
Regardless of what else the borrowers have or do not have, the only asset the lender can use to repay the obligation is the house and that is in writing in the reverse mortgage documents.
Finally, it’s a bit early to start including or excluding anything at this point about the home. We all hope our parents live a long, fruitful, happy life but tomorrow is promised to no one. In business, we call it the bus scenario.
If your in-laws step off a curb tomorrow and are hit by a bus, they would not have a chance to use all the equity in the home and even though you don’t want the house, why would you seek to put any type of provision in place now that would prevent you and any other heirs from selling the home if you don’t want it and retaining the equity?
Even if it was used for their expenses, it just might come in handy. If your in-laws do out-live their equity in the home and you are their heirs, nothing requires you to take title to the home after they pass or to make any effort to retire the debt.
Choosing to walk away
You don’t even have to participate in a Deed in Lieu of Foreclosure (which you can’t even do if you don’t have title to the property). You can choose to simply walk away from the home and let the lender take the property through a foreclosure action.
If this happens, the lender forecloses on the original loan which is filed based on the documents the borrowers executed (your in-laws, not the heirs) and even then, because they are deceased it is not reported to credit because it would not matter even if it was.
There are no credit ramifications so therefore, it would be a moot point to report to credit and heirs are never responsible for the credit of their parents and other family members anyway. In other words, a foreclosure has no effect on the heirs whatsoever if they so choose so there is upside to bailing on all possible heirship now before you even know what that entails.
You may be right, there may be no dollar benefit and then you can choose to ignore the situation later if that is your decision.
It may be that the time comes sooner than everyone hopes and there may be a huge upside to selling the property or another family member may benefit by that time by receiving the home. Under these scenarios, it would be extremely short-sighted to eliminate options now, you just never know.
Foreclosure & Heir FAQs
How does a reverse mortgage foreclosure work?
A reverse mortgage foreclosure is no different than the foreclosure of any other loan. The lender must follow the law for foreclosures in the area in which the property is located and that location will also determine whether the security instrument is a Deed of Trust or a Mortgage. The lender will follow the same procedures they would follow for any other loan. That would include usually a preliminary notice followed by a prescribed period wherein, if possible, any default could be cured. That time is followed by an advertising period during which the lender must advertise the foreclosure sale and the loan may still be paid in full during the advertising period but not cured and kept active. Most foreclosures are handled outside of court proceedings and ultimately all foreclosures result in a public auction of the property with the initial bid being the lenders for the amount owed to the lender.
How long do heirs have to pay off a reverse mortgage?
There is a practical answer for this question and that is until the lender takes the home through a foreclosure action. Even if the lender were to start the foreclosure the day they determined that the borrower had permanently left the home (i.e. passed), they could not complete such an action for 6 months in most locations and there are several things the lender must do before they can start a foreclosure. So, the actual time from the passing of the last borrower until the time the lender determines the loan must be repaid and the time, they can finally act which is the true time the heirs actually have to repay the loan, can be anywhere from 6 months at the absolute quickest to over 2 years (and in some cases the lenders are not made aware of the passing of the borrower(s) and it can take longer for the servicer to notify the heirs that the loan is now due and payable). However, borrowers should talk to their heirs and have a plan in place to be able to begin the process as soon as all original borrower leave the home (whether as a result of passing or to move to assisted living, etc.). The sooner the loan is repaid, the sooner interest ceases to accrue and there is no worry. If a plan is in place ahead of time, heirs are not left to scramble at a time of grief when they have just lost loved ones. There should be a mechanism in place to let the lender know who has authorization to speak with them on behalf of the loan (this can be done in advance and it is easier to do it while all borrowers have full faculties and are able to direct their affairs). Estate planning is a huge help so that families know what the owners’ wishes are and can proceed immediately (wills, estates, trusts set up in advance can resolve issues and allow heirs to move forward without delays in many instances, you should consult with your family attorneys for direction).
How long does it take for a reverse mortgage to foreclose?
A reverse mortgage foreclosure is no different than the foreclosure of any other loan. The lender must follow the law for foreclosures in the area in which the property is located and that location will also determine whether the security instrument is a Deed of Trust or a Mortgage. The lender will follow the same procedures they would follow for any other loan. The actual foreclosure process takes about 5 – 6 months from the time the lender files the first notice of default unless they are required to go through a court foreclosure which is rare. In that case, the timeframe would be dependent on the court’s schedule.
Are heirs responsible for a reverse mortgage?
Heirs have certain rights under the reverse mortgage if they wish to keep the home but heirs are never responsible under a reverse mortgage. They always have the option to walk away and owe nothing on the loan with no adverse effect on their credit whatsoever. After all, they did not sign any agreement to repay the loan so they cannot be held responsible for it. The reverse mortgage is a non-recourse loan which means that the only recourse or security the lender has is the property itself. They cannot look to any other assets of the borrowers for repayment of the loan and certainly not to the heirs of the reverse mortgage borrower to request repayment of the debt.
Can a family member take over a reverse mortgage?
Reverse mortgages are not assumable and never were intended to be transferrable or multi-generational loans. When the original borrower(s) of the reverse mortgage no longer live in the property as their primary residence, the loan becomes due and payable. Family members can refinance the loan with another loan if they wish, and if they qualify, they can even get a new reverse mortgage in their own name but they cannot just take over or live in the home under the terms of the original reverse mortgage.
About the Author, Michael G. Branson | Mike@allreverse.com
Michael G. Branson CEO, All Reverse Mortgage, Inc. and moderator
of ARLO™ has 40 years of experience in the mortgage banking industry. He has devoted the past 17 years to reverse mortgages