Carole has sent the following question in ask ARLO! blog.

Hello ARLO,

Hello. My stepmother is in her 80’s, has dementia, and is the sole Trustee of a Family Trust set up by my father years ago. My brother and I are the beneficiaries. A few years back her neighbors advised and assisted her in placing the house (which had been assigned to the Trust and is in the name of the Trust) into a Reverse Mortgage without consulting or notifying either myself or my brother beforehand. As sole Trustee, she has never provided required accountings and generally does not understand her responsibilities. My brother (who is the designated Successor Trustee, DPOA and Conservator) and I are exploring options related to either having our stepmother removed as Trustee, or finally getting the DPOA in place. This has been an issue because of terminology related to her “lack of capacity” or “ceasing to be responsible”. She has demonstrated both in her actions, however, she is still able to live in the home. However, she does require home care assistance a few days per week, and unfortunately, has tapped into an investment account to pay for this, again without consulting us. At any rate, we have not yet met with an attorney but will doing this soon. In the meantime, I am curious to know what would happen if she passes with the house in a Reverse Mortgage? I know that the loan becomes due about six-months afterwards, and I think I read somewhere that the house can only be sold at the appraised value, not the market value. This is my concern and am hoping someone there can verify this information one way or another. Thank you for your assistance.

The reverse mortgage loan becomes due and payable as soon as the last original borrower on the loan is no longer living in the home (your stepmother).

It’s not 6 months later, it is due at that time.

It typically takes a while for the lender to complete everything they need to do in order to call the loan and to complete the process and if the heirs are in the process of selling the home, they will work with the heirs and this is usually the 6 month period you reference with 2 – 90 day extensions possible if the lender and HUD are satisfied with the progress being made to pay the loan off.

Keep in mind that even if the lender didn’t like the steps being taken and had to begin a foreclosure at that time, the typical foreclosure process is 5 – 6 months with no snags at all and can go 12 months or more in some instances so they will not wait 12 months to even begin foreclosure if they see no progress being made as that would put them 24 months out in that case.

As far as the selling price, you can sell the home for any price you choose, you are not limited to the appraised value.

The issue that you may run into though is your terminology of “appraised value” vs “market value” and your expectations.

If the appraiser does his/her job well, the appraised value should be indicative of the market value.

The appraisal of a single-family home is most heavily weighted on the sales comparison approach.

That means that the appraiser is looking at the sales of other properties in the area and comparing them to the subject property, making any adjustments he or she feels is necessary to arrive at a value.

That appraised value is just one person’s opinion based on an analysis of current sales and doesn’t mean that is what the property will sell for, but that is what the lender will be looking at when you place the property up for sale.

If you don’t agree with the appraiser and list the home for $100,000 more than the appraisal and 6 months later the home still has not sold, the lender is going to tell you it’s because the listing price is not reasonable and will not grant you the extension you request because they will not reasonably expect the sale to be completed at your inflated expectation.

Your lender cannot dictate for what price you sell the home.

You own the property at that point and it’s up to you to determine the price at which you list and for how much you want to sell the home.

But if you decide you think it’s worth a lot more than the appraised value, you may need to be willing to pay the loan off with other funds available to you and then reimburse yourself after the sale because the lender is not going to wait for years to be repaid just so you can get your price.

The appraisal also determines the amount at which the lender will accept a payoff that is less than the full balance of the loan from the heirs if the loan balance exceeds the current value of the home.

For instance, the heirs have the option to keep the property if they so choose by paying off the current balance of the loan or 95% of the current appraised value, whichever is less.  I think those are the timeframes and the appraisal concerns about which you may have read.

Repayment FAQs

How do you pay back a reverse mortgage? 

You or your heir(s) can pay back a reverse mortgage with funds available, by refinancing the loan with another loan, by selling the property and using a portion of the sale proceeds or by letting the lender take the property.

Can you make interest payments on a reverse mortgage?

While no payments are required on the loan while you live in the property and meet the loan requirements, you may pay any amount at any time you wish without penalty.

What happens if you don’t pay back a reverse mortgage?

The lender would foreclose on the property that is the security for the loan but there is no other recourse.

This means that the only thing the lender must secure the debt is the property, no other assets of the borrower, their estate or from any heir may be sought to repay the obligation.

Can you pay back a reverse mortgage early? 

You may repay any or all of a reverse mortgage at any time without penalty.

There are no negative repercussions for paying a reverse mortgage early and you only owe what you have borrowed plus any accrued interest.

Are heirs responsible for reverse mortgage debt?

The home is the only security for the loan.  If your heirs do not repay the loan, the lender may foreclose and take ownership of the property, but not seek repayment from any heirs and this action has no effect on the credit of any heirs.

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