The financial market of the 21st Century is one of the most ruthless financial markets humans have ever encountered. In these financial market, one of the elements which is somewhere on the top is a loan. A loan is basically getting money in place of the ownership of your valuables. However, these loans are subdivided into several categories. One of the loans which has gained noticeable popularity over the past few years is a Reverse Mortgage. In US, the elderly are quite fond of this term as it is designed for the old people overall. However, there is still a lot of misconception about how this loan affects one’s heirs. As we move one, we will talk about some of the aspects related to the effects of a reverse mortgage on heirs.
What is a Reverse Mortgage?
The term basically appeared for the first time in 1980’s when the lender used started paying the borrower and not vice versa. Reverse mortgages are consecutive programs which allow the borrower to use a part of their equity, against which the lender pays money to the borrower. The major qualification for this loan is the age limit which is 62 years and above. This means that this loan is specifically for the elderly and retirees.
In a reverse mortgage, the borrower takes money from the lender, usually a bank, against the equity of this existing home. This money can be taken as a source of instant cash, to continue a steady cash flow, for refinancing of existing house etc. The interesting part about this loan is the way it has to be paid back. The loan is to be paid back in three situations.
- The borrower dies or both borrowers pass away (In this case the spouse signs the deed as well).
- The borrower moves away from the house for a year or more.
- The borrower sells the house against which the reverse mortgage was acquired.
Once the house is sold, the lender takes the full amount which was given to the borrower. If the borrower dies, the heirs are responsible of the payment. Now, the most common concern reverse mortgage recipients have is that how are their heirs affected by a reverse mortgage.
How Does A Reverse Mortgage Affect Your Heirs?
Let us make one thing clear, it is not possible to leave debts to someone after you die. There are always ways which are alternates to pay back debts of a reverse mortgage. After a borrowers death the heirs are reached by the lender and the heirs are told way in which they can pay the lender back all the dues. There are no lawsuits filed against your heirs as there are other ways of paying back reverse mortgages.
Source: https://reverse.mortgage/reverse-mortgage-heirs
* What happens to reverse mortgage when the borrower dies?
Due loans after borrower’s death:
After the borrower dies, the loans are due and have to be paid somehow by the heirs. One of these loans may include a reverse mortgage if your parents had acquired one. The loan has to be paid back in full by the heirs. The adult children should know that in all HECM’s a reverse mortgage is due and payable after the borrower’s death.
Source: Reverse Mortgages: What Happens After Death?https://reverse.mortgage/reverse-mortgage-after-death
Notice:
A notice is sent to the heirs which tells about the due payments of a reverse mortgage. The lenders have a way to find out about the borrower’s death through Social Security indexes etc. Right after the death, a notice or letter is sent out to the heirs to deal with the due payments of a reverse mortgage.
Options given by lender:
In the letter, some options are given by the lender to the heirs. These options may include selling the house and paying back the reverse mortgage in full. When selling the house, the heirs can choose their own estate broker. If the heirs want to keep the house, they will have to pay the value of the reverse mortgage in full.
Spousal Rights:
If the borrower dies, the surviving spouse may be able to live in the house if she or he was not a co-borrower. However, it is better for the surviving spouse to contact an attorney as in some deeds, the borrower might have removed a young spouse to gain a larger reverse mortgage. This leave the young spouse vulnerable to foreclosure and eviction after the borrower’s death.
* What options your heirs have?
Sell the house:
One of the options the heirs have is to sell the house and pay of the due debts of a reverse mortgage. This can be done by the heirs through their own broker if they wish to sell the house according to their own demands.
Pay the debts:
If the heirs want to keep the house for some reason, they have to pay the full due debts i.e. the complete amount of the reverse mortgage in order to keep the ownership of the house.
Do not take responsibility of the house:
The most intriguing feature of a reverse mortgage is that your children do not have to be responsible for the house. If your heirs do not have anything to do with your home after you are no longer living in the house or have passed away, they will not be responsible to make any payments. If the house is sold and the price is less that the dues of a reverse mortgage, the Department of Housing Urban Development (HUD) will not hold the heirs accountable to pay the rest of the amount. Any difference are forgiven entirely after the house is sold.
Bottom Line:
As we conclude, it would be safe to say that your heirs will not be negatively affected with a reverse mortgage after your death. You heirs have many choices which they can pick if they do not want the burden paying of the debts. Your heirs are not forced to pay the debts, hence, are safe from any lawsuits against them.
Additional Resources:
Kiplinger What Heirs Need to Know About Reverse Mortgages
Read more at http://www.kiplinger.com/article/retirement/T021-C000-S004-what-heirs-need-to-know-about-reverse-mortgages.html#EaxUpieGxWxRag7Q.99