Many children and family members of reverse mortgage borrowers are pleased that their parents or family members are able to use the equity they have accumulated over their lifetime to allow them to remain living in their home. This is contingent on complying with the loan terms or that foreclosure can occur. This is often a great relief to these family members that their parents are able to take care of their own needs rather than rely on their family for financial assistance.
There are questions that many family members have as their parents begin the reverse mortgage process. The three most commonly asked questions about reverse mortgages are:
How can I keep my parents from being taken advantage of?
There has been a lot of news lately about mortgage fraud in Utah and unfortunately, many people have been taken advantage of. It is only natural to be concerned for your parents to make sure they don’t fall victim to a scam. The great thing about an FHA insured reverse mortgage is that before the loan can be underwritten, the borrower has to discuss the loan with a counselor employed by a nonprofit organization or a public agency approved by HUD. This counseling can be very helpful to ensure your parents understand exactly what they are doing to make sure they have all their questions answered.
Once my parents pass away, what happens next?
One of the top reasons why seniors get a reverse mortgage is repayment is deferred until the borrower dies, sells the home, moves out of the house, or defaults on other obligations such as insurance payments or taxes.
As a child or heir of someone with a reverse mortgage, the same thing will apply to the estate allowing no payments for up to 12 months following the death of the last surviving borrower. Heirs have 6 months to repay and can request two 3-month extensions; This will allow you to deal with the rest of the estate items and not feel pressure to sell or refinance the house. This also allows you to sell the house at the prime time of year to get top dollar!
If my parents get this loan, will I lose the equity that I stand to inherit?
FHA and HUD have set up guidelines which determine exactly how much equity in the house will be available to be used in the reverse mortgage. The first guideline is age based; the older you are the more equity is available to borrow. Next, FHA has set “lending limits” that used to be on a “per zip code” basis, but recently they have been increased to $636,150 no matter where you live. No bank issuing an FHA insured reverse mortgage no matter how old the client is can lend more than the lending limit. These guidelines alone should insure there is equity in the home for many years, but if not, the third guideline is a mandatory mortgage insurance that is part of the loan. If the balance of the reverse mortgage exceeds the value of the home, the mortgage insurance kicks in to pay the difference upon the sale of the home. This way those who stand to inherit the house will not be inheriting a bill!
In addition to the lending limits and the equity reserve that is built into the loan, we still have natural appreciation that happens over time. Although it is impossible to know for sure how much equity will be available for the heirs to inherit, it is nice to know that your parents will be better-taken care of financially and will live a better quality of life while they are here.