How Reverse Mortgages Affect Heirs & Inheritance

April 28, 2021 By Mike Branson Jr. 12 comments

A reverse mortgage allows you to live in your home for life requiring no monthly repayments. Your benefit amount is based on borrowers’ ages, property value, HUD lending limits and interest rates, not the amount you owe so you may receive only enough to pay off your existing loan on the home, but in many instances, borrowers receive a large enough benefit to pay off their existing mortgage and still give them additional funds for other uses.

Heirs Have Indirect Benefits to Reverse Mortgages

Firstly, if you need the equity or other funds to remain in place and your children are unable to assist you, it helps to relieve any burden on them to try to come up with additional funds to help you each month.

The loan allows you to live in the home payment free for life and no matter how long that is, how much you borrow, how much the reverse mortgage interest accrues or what property values do in the future, it assures heirs that they will never owe more than the property is worth.

In other words, if you pass and the balance on the loan is higher than the property value, the lender and HUD can never look to other estate assets or heirs to pay that shortfall.

Reverse Mortgages are Non-Recourse to Heirs

Source: https://www.hud.gov/sites/documents/42351C1HSGH.PDF

Heirs always have the right to keep any equity or if there is no equity, to retain the property at 95% of the current market value or the amount owed on the loan, whichever is less. This allows them to qualify for conventional financing if that is their choice and does not require them to repay an obligation totaling more than the value of the home if they want to keep it.

And if there is no one in the family that does want the house and they don’t believe it is in their best interest to sell it (no equity, etc.), they can walk away and owe nothing. However, when we hear criticism of the loan from some who have not really considered all aspects of reverse mortgages, it is usually because if you choose to get a reverse mortgage, it can lessen the amount of the asset that you leave behind to your heirs.

How Reverse Mortgage Interest Works

This is true, but no one stops to think that if you have a regular loan, that is also the case. Any loan lowers the equity in the property and therefore, there is less inheritance to pass on to future generations. And the fact that you make no monthly payments and interest accrues raising the balance owed is another argument that asset conscious people use to criticize the loan.

However, if you review the reverse mortgage amortization schedule of any loan, you pay mostly interest in the early years of the loan and over the course of 30 years, you pay a substantial amount of interest above and beyond the principal you borrowed.

If just passing the most asset to a future generation is your goal, you should never seek any loans or debt of any kind. Unfortunately, most of us cannot live totally debt free all our lives or purchase real estate for cash. And what most people don’t consider is that if you are able to make payments on the reverse mortgage to eliminate the balance from increasing, you can always do so at any time without penalty.

You can make payments in any amount at any time!

This means that you do not have to have an increasing balance but since there are no mortgage payments “due” at any time, if you find that your finances are such that you are not able to make a payment or only able to make a partial payment of the interest that accrued that month, there are no negative repercussions.

There are no late charges or negative credit concerns because you didn’t have a payment to make in the first place.

Reverse Mortgage Alternatives?

Another thing that many people do not consider if future generations are able to help, they can set up a family reverse mortgage to allow parents or other family members access to cash and then be repaid upon the passing of the older family members.

If you do choose this route, my suggestion would be to be sure everything is in writing so that there are no hard feelings among family members later if some run into monetary problems of their own and cannot continue to help as they first agreed or there are disagreements on the asset distributions after the repayment of funds advanced by some but not all family members.

At least with the reverse mortgage (like any other loan), the asset is sold, and you determine how all proceeds are split if you have a will or trust and there is no question about who did what.

Finally, I think that homeowners should consider a reverse mortgage for the benefits or the ramifications that it would have for them and their goals. We strongly suggest that you discuss it with your family.

There seems to be a strong resistance at times with some in that they do not want to “bother” kids with their finances or issues but it really helps if heirs are aware of the loan in advance and what they need to do when the time comes that they have to decide to keep or sell the home.

It also really helps if the owners have their kids/heirs set up in advance with the lender so that they can speak with the lender on behalf of the loan and have all title issues resolved in advance. One good way to resolve title issues is to add children to title or to have a trust set up in advance and you should check with your family attorney to advise you in this regard.

Summary

When researching a reverse mortgage, it’s important to speak to your family and trusted financial advisor to weigh both the pros and cons. Learn more about how a HECM loan might be right for you by contacting one of our top reverse mortgage lenders, or check your eligibility with our free reverse mortgage calculator.

Also See: 3 Options After Death of a Reverse Mortgage

12 Comments on “How Reverse Mortgages Affect Heirs & Inheritance”

Admin July 8, 2021

MinaJuly 8, 2021

Our Grandmother passed away, my aunt is the heir, and my cousin wants to purchase the house. We have been told we need a real estate lawyer to open the estate to allow the sale. There is no contest. The family is all onboard with the same intention. What process is required to allow the sale?

Reply
- Admin July 8, 2021
  
  ReverseMortgageReviews.orgJuly 8, 2021
  
  Hello Mina,
  
  I'm afraid I cannot answer this. There are different requirements for different states. For examples, Texas has very strong heirship laws and the answer would be different in a state like Texas than in a state like California.
  Even then, the fact that you are telling me that your aunt is the heir, and you have questions regarding your cousins tells me that there are other siblings (still living or deceased) of your aunt who may or may not have ownership rights and it may require a court probate to determine the absolute ownership.
  If someone is telling you that you need an attorney, it could be that the property does need to go through probate, but I honestly cannot say. Perhaps you should contact more than one person in the legal field to get multiple opinions. I would think that an estate attorney would tell you honestly if they would be needed to clear the title or not.
  Once the title is in your aunt's name and there is no cloud on title, she can gift or sell the home to your cousin -the lender does not control that but until your aunt owns the home, she can't grant title to anyone else through a sale or otherwise.
  The loan must still be paid in full though, so you just don't want to wait too long before you make that determination.
  
  Reply
Admin February 22, 2022

DaynaFebruary 22, 2022

My mother passed away and was the last survivor in the home as my dad passed away a year and a half ago. We do not think we can sell the home to cover the current reverse mortgage. We have a Trust attorney and we have the home as a part of the probate process. If we walk away from the home as is would we as heirs would this affect our credit in any form?

Reply
- Admin March 9, 2022
  
  AdminMarch 9, 2022
  
  Hello Dayna,
  
  Correct me if I am wrong, but none of the heirs ever signed a Note promising to pay the obligation, right?
  
  The point is, the loan is non-recourse which means that the lender has only the property to look to for repayment of the loan anyway so neither the lender nor HUD cannot even look to other assets of the estate to pay off any balance not covered by the sale of the home, let alone try to collect from heirs or adversely report to their credit profiles on a loan they never applied for or agreed to repay.
  
  None of the heir's credit will ever be affected as you were not parties to the loan itself and therefore cannot be held accountable for your relative's debts or have your credit affected by them. And just as a bit of information, when the borrowers pass, lenders do not report negatively to credit bureaus on the borrowers either, there is no useful reason to do so.
  
  Reply
Admin March 17, 2022

Bettye M.March 17, 2022

What are set asides? If the homeowner pays set asides every month and does not use it, where does that money go?

Reply
- Admin March 21, 2022
  
  ReverseMortgageReviews.orgMarch 21, 2022
  
  Hello Bettye,
  
  As the term indicates, money set aside is not paid monthly but split off from the loan proceeds available through the loan and "set to the side" that is used for the specific purpose for which they are being saved and set aside.
  Set aside funds from the loan are not available to you to use and the lender uses them to pay for expenses on your behalf. For instance, "set asides" for taxes and insurance would be where the lender set money aside from your available loan proceeds that they would use to pay your taxes and insurance on your home as they came due. You don't pay them monthly; it would be one amount that would be taken from the total loan proceeds â€“ the borrower does not pay set asides from their pocket.
  
  For example, a borrower that has a reverse mortgage in the amount of $250,000 but is required to set funds aside to pay taxes and insurance might have $50,000 (the amount would be determined based on your age and the amount needed to pay your taxes and insurance, the younger you are and the higher your taxes and insurance the more money that would need to be set aside to pay them for life).
  This money is only borrowed when the lender sends them to the tax collector or the insurance company to pay your tax assessment or your insurance premium and then only the amount actually paid to that entity is added to your loan balance. So, if your taxes are $600 per installment, that $600 would be paid and that amount would be added to your loan balance owed and your set aside would go down by the amount paid.
  Even though you can't use it for other purposes, your set aside balance is part of your line of credit so those funds also grow at the same rate as your line of credit on the unused portion of the line. These funds would be used to pay your taxes and insurance on your behalf so that you do not have to pay them anymore.
  
  If you sell the home or pass before the funds are all used, they would not need to be repaid when you or your heirs sell the home. Using that same example, if you had a $250,000 reverse mortgage and $50,000 of it was set aside to pay taxes and insurance, if you sell your home or pass, when you sell the home or when you pass, you or your heirs only pay back the portion of the loan you actually used plus any interest that accrued on that money.
  So, if you only used $100,000 of your line of credit and the lender only advanced $10,000 of the set aside funds for taxes and insurance, you only borrowed $110,000 and so your payoff would be $110,000 plus the interest you accrued and any costs you financed to get the loan. Even though you had a set aside of $50,000 you didn't use $50,000 so you do not have to repay that much money. There is no money to refund to you because the lender never charged you anything for those funds either. Just like the other $140,000 you had available on the loan that you never used, you do not accrue interest on money you do not use.
  
  There are also set aside funds for repairs but those are either used or put back into the available funds for the borrower within 6 months when the necessary and agreed upon repairs are completed. The only time this is different is with a fixed rate reverse mortgage and then any set aside funds not used for the repairs are used to pay down the balance of your loan.
  The fixed rate reverse mortgage program is a single draw program and any funds you do not receive at closing will not be given to you later, they are used to pay down the outstanding balance of the loan.
  
  Reply
Admin June 26, 2023

DebraJune 26, 2023

My mom had a reverse mortgage, and she passed away. We are trying to sell the house; however, each of us, the heirs, received a 1099- but we did not receive any proceeds from the house. Will this 1099 affect those of my siblings that are receiving disability or social security, and why did we receive a 1099 when the proceeds went back to HUD.

Reply
- Admin July 1, 2023
  
  ReverseMortgageReviews.orgJuly 1, 2023
  
  It would be best if you spoke with your accountant or trusted tax advisor, but a reverse mortgage for your parents should not affect your receipt of any programs, needs-based or not. Even if you were the borrower, which you are not, the reverse mortgage is not income, and therefore, reverse mortgage proceeds do not typically affect the borrower's receipt of social security or disability income. For some needs-based programs where receipt is dependent on no more than certain levels of assets in the bank, etc., borrowers need to be careful not to pull more funds than they need from their reverse mortgage or what they can spend in a bank cycle so they do not have more money in their account when the statement is prepared. They can jeopardize their eligibility for some programs, such as Medicaid, if they allow borrowed funds to accumulate in their bank account, but that can easily be avoided with careful draws and spending the funds drawn before the following statement is prepared by the bank, always keeping their bank balance below the required threshold to remain eligible for the program. Anyone concerned about their specific circumstances should contact their disability provider to request information if your particular program has a maximum asset requirement to remain eligible. I also need help understanding all the circumstances from your description. The loan would not have been finalized if you were still attempting to sell the property. Did you get funds from another source to repay the reverse mortgage before the property's sale? If not, the lender should have yet to send you any final documents as of this date.
  Also, interest is only paid on the loan once the loan is paid in full. Still, once it is, lenders send out 1098s to borrowers, indicating the interest paid on the loan. They do this after the loan because that is when interest is paid, at the loan payoff, instead of annually, as is the case on forward or traditional loans where interest is paid monthly. Are you looking at a 1098 form for interest paid at loan payoff, not 1099? If it is an actual form 1099, I wonder why you received it and would advise you to contact the lender to discuss it and also your tax advisor.
  
  Reply
Admin June 30, 2023

Rita G.June 30, 2023

My mother had a will before getting a reverse mortgage (I think it is fixed, as described in the article comments above, i.e.). She was told at closing what happens when parents both die. They said in sum that we would be allowed six months to settle the estate or give them the keys and walk away, owing nothing! But now Mother has passed, father predeceasing her, I am the first executor in her will. Will is pretty cut and dry, leaving home to our brother(5 of us living, 4 sisters, 1 brother living, plus one brother deceased ). My dilemma is whether I should file the will, cause my brother cannot buy back the house. He does not want a house but money from us or his portion, whereas one sister wants to keep it, and 2 brothers want it! I want nothing but to keep all happy! Being brother wants nothing but to sell a house with a lien on it and no means to pay back the loan or HERM? Should I treat it like no will or file will for the sake of myself working with the lien holder? I'm just concerned if I present a will, and they learn brother won't pay it back, that lien holder will discard the rest of us and proceed to take the house from us. True or false?

Reply
- Admin July 4, 2023
  
  ReverseMortgageReviews.orgJuly 4, 2023
  
  Hi Rita,
  I can't give you legal advice or tell you what you should do with your family, but I can tell you how the loan will work. The lender will call the loan due and payable. That means that the heirs can sell the home and keep any equity, pay off the loan at the lesser of the amount owed or 95% of the current market value, or walk away and let the lender take it back.
  You first need to determine what the home is worth and how much is owed. If there is equity in the home (the loan is lower than the value of the property), you need to decide what YOU want to do. The lender can't decide for you. They will call the loan due and payable now regardless of your plans because no more borrowers are living in the home, so it is up to you to decide how you want to pay it back (sell the home, pay the loan off with funds you have or take out a new loan to pay off the reverse mortgage) or walk away. And if there is equity, there is no reason to walk away from it.
  The lender can't "take the house" from you. But the loan is due and payable now. It would be best if you made a plan based on the equity in the home and what you want to do. If you do not pay the loan off, eventually, the lender will foreclose on the default. You can lose any remaining equity that way, which would be a travesty, especially if it was due to delays solely because the family couldn't agree on a plan of action.
  I might suggest a compromise. Only one sister wants to keep it. Can she pay the others their share of the proceeds on a sale? If so, determine a most likely price from a local realtor minus costs to sell, subtract the amount owed, and then divide the proceeds by the number of siblings, and the sister who wants to keep the house would need to pay that amount to each of the remaining siblings. For example, if the house is worth $300,000 and the total payoff of the loan is $150,000, you have $150,000 in equity. If the realtor tells you the cost to sell the home would be $20,000, you subtract that from the $150,000, and you would have a "pot" of $130,000. $130,000 divided by 5 is $26,000 per sibling. The sister who wants to keep the home would need to be able to get a loan high enough to pay off the existing reverse mortgage and either have the cash or access to sufficient funds to pay each sibling $26,000.
  Everyone would be equal, and each would have what they want (either cash or the house) with this type of arrangement. But you need to be able to execute quickly, so you must be sure all siblings are on board or capable of completing this type of compromise. Any way you look at it, it's always challenging with family. I wish you the best.
  
  Reply
Admin July 21, 2023

Bonnie T.July 21, 2023

What would be the best solution for my sons, who are living in the house? How long would they have to stay in the house after I pass, assuming they will walk away from buying the house? The house the purchased in 1988 for $125,000, and the loan is twice that now. If the sons decide that they would like to purchase said CONDO, and the Condo is now worth $450,000, could the Sons keep the difference in equity and purchase the home with the sale proceeds? I would appreciate a reply regarding my questions. Please do not bother me with phone calls. I am merely looking into the options for the sons after I pass.
Thank you

Reply
- Admin July 27, 2023
  
  ReverseMortgageReviews.orgJuly 27, 2023
  
  Hello Bonnie,
  Your sons can keep the home and repay the loan at the lower amount owed or 95% of the current market value. That means if the house is worth less than the amount owed, they can pay the loan off in full for less than the amount owed as long as they can pay 95% of the current market value toward the balance. This can be done with money available to them or with a new loan.
  They also can sell the home if they choose. In your example, if the home is worth $450,000 and the loan balance is $200,000, the remaining equity belongs to them. The existing loan would be paid off at the close of the sale in escrow, and the proceeds would then go to your heirs according to your wishes. If the property is worth less than the amount owed, they can choose to walk away, not owe a dime, and not worry about selling the property.
  The lender will contact the heirs once they determine that the last remaining borrower on the loan is no longer living in the property. Suppose they let the lender know they want to sell or keep the home and request pay off options. In that case, the lender must do an appraisal of the property and will let them know what those options are based on the loan balance and the value. The lender will work with your heirs to give them time to procure financing or sell the home. It is usually in 3-month increments with extensions available if they need more time but can demonstrate that they are working diligently toward finalizing the loan payoff. Remember, the lender usually doesn't find out for some time that the last borrower has passed. It takes at least 2 â€“ 3 months to assemble the information and obtain the appraisal. They will work with family members who need more time to sell or finance. It is not uncommon to hear of it taking a year or longer to start a foreclosure if the family members do not pay off the loan or sell the property. A foreclosure action typically takes 5 â€“ 6 months from the time the first documents are filed, so nothing happens quickly.
  It is still best for family members to have a plan ready to implement before reverse mortgage borrowers pass though. It is already tough enough when loved ones pass; the last thing you need to do is start trying to figure out what you want to do and how you need to do it after the death of a loved one. It is much easier for the borrower to make their wishes known and sign needed documents while still living than for heirs to run around later to do things afterward, especially given the circumstances.
  
  Reply

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