Reverse Mortgages and Inheritance
The most common questions asked about reverse mortgages include “what happens to my reverse mortgage debt after I die?” and “how can my children inherit my home after I have gotten a reverse mortgage on it?”. Understanding reverse mortgages and inheritance is essential before taking out a reverse mortgage loan. People are concerned that the bank may take their home after they die or that the value of the mortgage may exceed the value of the home and their heirs will inherit the excess debt.
Thankfully, reverse mortgages are structured in such a way that if you take one out on your home you will have options to avoid these scenarios. Here is a description of the inner workings of reverse mortgages and an outline of the options available to you and your survivors should you sell your home, move out or pass away.
How reverse mortgages work
A reverse mortgage can be seen as the opposite of a standard mortgage (otherwise known as a forward mortgage). With forward mortgages, you borrow money from the bank or lender using your home as collateral and immediately start paying back that loan (with interest) through monthly payments. At the beginning of the loan term, most of what you will pay with a forward mortgage is interest and a smaller amount goes towards paying the principal of the loan. As time goes on, you will pay more and more of the loan’s principal and less and less of the interest with each payment until, 30 years later, the loan is paid off. Of course, many people will sell a home prior to the 30-year term. If this happens, it’s typical that the mortgage is paid off in full using the proceeds of the sale.
Reverse mortgages work differently. If you are 62 or over, you can take out a reverse mortgage on your home which, like a forward mortgage, involves the bank or lender using your home as collateral and giving you loaned cash. The difference is that, unlike a forward mortgage, you will not have to make any monthly payments to the lender! While you are not making payments though, the interest you would have otherwise paid that month with a forward mortgage is added to the balance. Interest is added each month, growing the balance until one of three things occurs: you sell the house, move out of the house, or pass away.
The role of the FHA
The vast majority of reverse mortgages are backed by insurance from the Federal Housing Administration (FHA). This insurance pays the lender the difference between the value of the home and the balance of the mortgage should the balance exceed the value of the home. FHA-backed reverse mortgages are subject to a limit of coverage which, in 2023, is $1,089,300.
Borrowers are responsible for paying premiums to the FHA to finance this insurance. Those premiums include an upfront premium paid at the beginning for the reverse mortgage when the initial disbursement is made and then a premium of .5% of the outstanding loan balance paid annually. It is very important that reverse mortgage borrowers are able to afford this insurance premium along with other property expenses such as property tax and HOA fees.
Selling your home with a reverse mortgage
If you are a reverse mortgage borrower who is contemplating selling your home, it is important to understand how your debt will affect the proceeds you will receive from the sale of your property. When you sell the home, the reverse mortgage balance (including the principal, accrued interest and fees) becomes due. If the house sells for more than the balance due to the lender, you will be able to keep the money. However, if the value of the home has decreased and you owe more to the lender than you are getting in proceeds from the sale, you will be required to pay off either the total loan balance or 95% of the appraised value of the property, whichever is lower. In other words, the worst-case scenario is the lender gets all of the sale money but no one gets saddled with debt. The FHA insurance mentioned earlier covers the remaining balance due by paying the difference directly to the lender.
The law stipulates that as a reverse mortgage borrower, you will not be required to pay capital gains taxes on the first $250,000 (it’s a combined $500,000 if married) of profit you make when you sell the house.
Moving out of your home with a reverse mortgage
One of the stipulations of a reverse mortgage is that you stay in your home until you are ready to pay off the loan. Therefore, moving out of the home, triggers the need to pay back the reverse mortgage to the lender. Lenders generally allow being away from the property for “medical reasons” for up to 12 months. This typically includes being in a nursing home, rehabilitation clinic or hospital. After 12 months though, you would be expected to pay back the loan.
“The law stipulates that as a reverse mortgage borrower, you will not be required to pay capital gains taxes on the first $250,000 (it’s a combined $500,000 if married) of profit you make when you sell the house.”
What happens to spouses when you pass away with a reverse mortgage
If you are a single borrower, when you pass, your reverse mortgage balance including principal, interest and fees becomes due. If you are married what happens depends on if your spouse is a co-borrower, non-borrower eligible spouse or non-borrower ineligible spouse.
In the event of your passing, if your surviving spouse, partner or roommate is a co-borrower listed on the reverse mortgage policy then they may stay in the house and receive the proceeds of the loan.
If the spouse is not listed as a borrower on the reverse mortgage but is an eligible spouse, then they are able to continue to live on the property, and are not required to pay off the loan until they die, move or sell the property. They are, however, required to maintain the property keeping up with the expenses related to the home including property taxes, HOA fees, homeowners insurance and assessments and paying the FHA premiums. Furthermore, the eligible spouse cannot be paid out from the reverse mortgage. In other words, in cases where a reverse mortgage makes monthly payments to you, after you die your eligible spouse won’t receive those payments.
To qualify as an eligible spouse, the spouse must be listed as such on the mortgage, be married to the borrower at the time the mortgage was signed and remain married to the borrower until the death of the borrower.
Non-eligible spouses are required to move out of the house when the borrower dies or moves away for more than 12 months (such as would be the case with moving into a nursing home).
What happens to heirs when you pass away with a reverse mortgage
When you pass away, this does not mean that the lender takes your house from your heirs. Your heirs have three options to make the lender whole after you pass, they can:
- sell the home to cover the reverse mortgage balance debt keeping any gains made above the principal, interest and fees
- keep the property by refinancing the reverse mortgage balance into a forward mortgage, provided the home’s value and homeowner’s equity allow for this
- settle the loan by turning over the property to the lender
In any situation, the heirs will not be burdened with any excess debt beyond the value of the house. Remember that the lender files a claim to recover the unpaid balance with the FHA (assuming it is an FHA reverse mortgage, which is the case in 95% of reverse mortgages).
Intercontinental Ultimate Solutions
Intercontinental Ultimate Solutions is an experienced reverse mortgage broker with access to a variety of safe and secure reverse mortgage loans to senior home buyers in Intercontinental Ultimate Solutions is an experienced alternative mortgage broker with access to a variety of mortgage options for self-employed and unemployed home buyers in Florida, Arizona, California, Colorado, Connecticut, California, Maryland, North Carolina, South Carolina, Texas, Virginia and New Jersey. With over 20 years of experience in the industry, Intercontinental Ultimate Solutions knows how to get you the best mortgage loan for your needs. With over 20 years of experience in the industry, Intercontinental Ultimate Solutions knows how to get you the best reverse mortgage loan for your needs.
If you’re interested in a reverse mortgage loan, be sure to contact Intercontinental Ultimate Solutions today! Our team of experts will be able to help you find the ideal option based on your situation.
