 |
Guiding borrowers to the right decisions Protecting borrowers from mortgage predators |
My answer to this question applies to the HECM program
administered by HUD, with investors in the mortgages insured
against loss by the Federal Housing Administration (FHA). On
the many private reverse mortgage programs that have come
and gone over the years, the answers would be very
different. The private programs have had many fewer consumer
protections.
Owner/Borrower Sells the House:
In some cases,
reverse mortgage borrowers change their minds about aging in
place. They may decide to downsize, or move to a retirement
community, or to a nursing home. In all such cases, they
sell their existing home, which requires that they pay off
the reverse mortgage balance. The net proceeds from the sale
belong to them.
Owner/Borrower Retains the House
But Repays the HECM:
Occasionally, homeowners treat a reverse mortgage in the
same way they treat a forward mortgage: they pay it off.
There are no prepayment penalties on a HECM so the borrower
who wins a lottery can eliminate her debt with no hassle.
They can also pay down the balance but leave the HECM in
place in case they need to access it in the future. \
When a HECM borrower dies, all known heirs receive a
condolence letter from the servicer that tells them what
their options are. If there is significant equity in the
house (meaning that property value is well in excess of the
HECM loan balance), the relevant option is to pay off the
balance.
Heirs Want the House:
In this case, the
heirs acquire title by repaying the HECM loan balance. If
the heirs keep the servicer informed regarding their
intentions and their status, and document their intention to
acquire the property, they may have up to a year to repay
the balance. They have an incentive to move quickly, since
interest and insurance premiums accrue until the loan is
entirely paid off.
Heirs Don’t Want the House:
This case is the same
except that the heirs can obtain the funds needed to pay off
the HECM by selling the house. The heirs will retain the
difference between the HECM loan balance and the net sale
proceeds.
If it is very clear that the reverse mortgage loan balance
exceeds the value of the home, one option relevant to the
heirs is to do nothing. This will trigger a foreclosure
action by the servicer. In some cases, the heirs might be
asked to complete a deed in lieu of foreclosure, but as far
as the heirs are concerned, the result is the same. The
borrower’s estate is not in any way liable for the excess
debt, which becomes a charge against the insurance reserve
fund.
If the heirs want the house, they can get it without being
stuck for the excess debt. HUD offers heirs the option of
paying 95% of HUD appraised value, less closing costs and
Realtor commission. For example, if the HECM debt is
$200,000 but the HUD appraised value is only $100,000, HUD
will accept $95,000 less documented costs.
HUD made some rule changes beginning in 2014, designed to
protect non-borrowing spouses (NBSs) from being forcibly
evicted on the death of the borrowing spouse. These
rules have weakened the position of the borrower’s heirs in
cases where the borrower has an eligible NBS. An eligible
NBS was less than 62 and married to the borrower when the
reverse mortgage was taken out, remained married until the
borrower died, and has lived in the home as her permanent
residence.
The existence of an eligible NBS creates a deferral period
of unknown length. So long as they pay the property taxes
and insurance, the NBS can remain in the property until they
die. Meanwhile, the HECM loan balance continues to increase.
One potential heir I know, who has a parent looking to marry
a much younger spouse before taking out a reverse mortgage,
is talking up the benefits of a permanent liaison instead of
marriage.
Thanks to Ryan LaRose of Celink, a HECM servicer.