During estate administration, the executor of the estate must resolve any debts or taxes due before dispersing assets among heirs. When someone takes a reverse mortgage out on a home, they could be setting heirs up to foot the bill.
Reverse mortgages are usually a type of equity conversion mortgage known as an HECM. These loans are insured federally, but that means they come with regulations that don’t necessarily impact non-HECM loans. One of the rules of these loans is that they are usually due when the person who took out the reverse mortgage passes away.
Banks rarely demand payment in full right away, as common sense tells you that families can’t make such decisions or follow through with probate issues in just a few days. However, banks will send letters regarding the loan to the estate; such letters spell out the requirements of the loan and the steps heirs must take to settle the debt and regain ownership of the home. Such letters can pile stress on an already stressful situation for those attempting to administer an estate.
How heirs wish to deal with a property that is tied up in a reverse mortgage is up to them and any wishes spelled out in the deceased’s estate paperwork. Heirs can pay off the mortgage with funds from the estate or a life insurance policy, they can refinance using a more traditional mortgage or they can choose to sell the home and allow the bank to keep some or all of the proceeds to cover the mortgage. When committing to any type of debt — or dealing with debt that is part of an estate — it’s important to understand how financial decisions can impact the overall estate requirements.
Source: Houston Chron, “Mortgage: What happens to reverse mortgage after your parents die?,” Marcie Geffner, July 10, 2015
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