A reverse mortgage is a mortgage loan, usually secured over residential real property, which enables the borrower to access the equity value of the property. Specifically, it is a financial agreement in which a homeowner relinquishes equity in their home in exchange for regular payments or a lump sum of money based largely on the value of the house, the age of the homeowner(s), and current interest rates. These loans are typically promoted to older homeowners (62 years of age and older) as a means of supplementing retirement income. Unlike a traditional mortgage, in which principal declines as you pay down the loan, with a reverse mortgage, the amount owed rises over time as interest on the loan accrues. Furthermore, while all mortgages have costs, reverse mortgage fees, such as the interest rate, loan origination fee, mortgage insurance fee, appraisal fee, title insurance fees, and various other closing costs, are high when compared to a traditional mortgage—and these costs are typically rolled back into the loan. That said, reverse mortgages usually do not require monthly mortgage payments. Rather, the loan is required to be paid back only once the last surviving homeowner dies, sells the house, or permanently moves out.
While reverse mortgages can be a great help to older homeowners in need of additional cash flow, they can, unfortunately, be a nightmare for the heirs of the homeowner. When the homeowner passes away, whether with a will or without (intestate), the house passes to the homeowner’s legatee(s) or heir(s), respectively. The fiduciary of the deceased homeowner’s estate has the following options:
- Pay off the loan;
- Buy the house from the lender at 95% of its value;
- Sell the house and use the sale proceeds to pay off the loan;
- Deed the house to the lender; or
- Do nothing and let the lender foreclose on the house.
If the value of the house is less than the principal and interest of the loan, the lender cannot pursue the estate of the deceased homeowner or the heirs of the deceased homeowner for the remaining balance of the loan. Instead, the lender will be paid the entirety of the proceeds of the sale of house and will consider the reverse mortgage satisfied.
If the value of the house is greater than the principal and interest of the loan, then that portion of the sale proceeds necessary to satisfy the reverse mortgage will be paid to the lender and the remaining balance will be retained by the deceased homeowner’s estate.
The fiduciary of the deceased homeowner’s estate has only thirty (30) days from the homeowner’s passing to determine what option they would like to proceed with the reverse mortgage and up to six (6) months to arrange financing. Unfortunately, many lenders are not notifying fiduciaries of their rights and are instead immediately beginning foreclosure proceedings upon learning of the homeowner’s passing. Additionally, many fiduciaries are not aware that if the family wants to keep the house, they can either pay off the reverse mortgage or buy the house from the lender for 95% of the appraised value.
For these reasons, it is important that a fiduciary of an estate hires counsel to address the avenues they may take when dealing with a reverse mortgage of a deceased homeowner.