As your parents get older and retire, their income will dwindle, too. Looking for an alternative source of cash, many seniors turn to the reverse mortgage, and it can have quite the impact on you, the heir, and your inheritance.
It’s what it sounds like, a mortgage in reverse: a borrower taps into the equity they’ve built in their home. The requirements are pretty minimal, too. There’s no need to make monthly payments. You do have to be at least 62 years old to take out the loan, but you don’t need a credit check.
While the transaction is easy, the interest payments most certainly are not. With a fixed-rate FHA-insured mortgage, a borrower may be paying 4 or 5%, and it compounds monthly, too. In other words, it adds up, and can sap your inheritance over time. We’re here to help, so we detail, below, your responsibilities as an inheritor.
The Benefit to Your Parents
For your parents, though, a reverse mortgage enables them to maintain their standard of living. It’s also a way to avoid asking for handouts.
“They can continue to live with some dignity without fear that they’re going to run out of money, or pay for things or even their daily expenses. It’s sad to see when you walk into somebody’s home and they’re trying to make the decision between buying medication or food,” said Philip E. Lipp, the president of Allwest Mortgage and the former president of the California Association of Mortgage Professionals. “At least there’s a mechanism—if they own a home—so that they can live a better life in their remaining years.”
A quick note: Herein we discuss one particular type of reverse mortgage, insured by the Federal Housing Administration. There are also lender-insured and uninsured reverse mortgages, which carry different responsibilities and, in the latter’s case, different repayment plans. We focus, instead, on the FHA-insured reverse mortgage because it’s significantly more popular—and often less expensive, too.
Your Options As an Heir
As we noted earlier, monthly mortgage payments are not required. Repayment is only due in a few cases:
- If the borrower dies
- If the home is sold
- If the borrower moves for more than 12 consecutive months
- If the borrower doesn’t meet basic requirements, including paying homeowners insurance, property taxes and utilities
When any of these occurs, you have a decision to make: to keep the home or to sell.
If you want to keep the home, you have a couple options. You can either settle the debt or refinance. The former isn’t always easy, depending on how much equity your parent or benefactor converted into cash. The FHA can give you a break, though, with something that’s called the 95% rule: when settling the debt, you can pay off the balance or you can pay up to 95% of the value of the home, whichever is lesser.
If you’d like to sell, your obligations are pretty minimal, because this is a non-recourse loan and you didn’t sign your name to it. So, no, your credit will not be affected. Best of all, even if the sale of the home fails to make up for whatever balance your parents incurred, you’re not responsible for the remaining amount, thanks to insurance.
At the loan’s origination, your parents purchased an insurance premium, which protects both them, the borrowers, and you, the heir.
In case of a short sale, with that insurance fund, the federal government would then pay the remaining balance, which is great for you, who need only surrender the deed. “Basically, they will never owe more what the home is worth. In a declining market this is extremely valuable,” said Richard Booth, a CMB with America’s First Lending Group.
As Booth notes, with home values having declined the last few years, your parents might be running low on equity. But smaller inheritance aside (which is definitely a significant detail), this, coupled with the debt brought on by a reverse mortgage, shouldn’t be a burden to you, though all aspects definitely need to be considered.
Angie Picardo is a staff writer for NerdWallet, a personal finance website dedicated to helping consumers find the best credit cards.