Stronger regulations? Yes, but always the best tool for the family? No!
Reverse mortgages are now under strong regulations and can be a helpful tool for the elderly homeowners who are retiring and have built up equity. However, there are still some dangers that family members may end up facing, according to the Arizona Central in “Reverse mortgages can cause problems when spouses, heirs aren’t on board.”
The reverse mortgage lets an owner tap into the equity in their home. They receive income, but the loan does not have to be paid back, until the owner either dies or moves out permanently. One issue occurs when the homeowner either dies or must leave the home for health or other reasons. The person or a family member must pay the entire amount that was borrowed or sell the property to satisfy the loan, usually within a very short period of time, such as six months.
That can put surviving spouses and heirs in a bind. If the surviving spouse needs to stay in the house, or family members haven’t planned to leave the house, they can end up facing eviction notices and legal challenges from the mortgage company.
There may be conflicts, if family members did not know there was a reverse mortgage or if they weren’t told that they might have to move.
This is just one reason why anyone considering taking a reverse mortgage should explain what they are doing with their spouse, family members and estate planning attorney. The family must be prepared for what may follow and be sure it makes sense to go forward with a reverse mortgage.
One family thought their two brothers were going to inherit a home owned by their mother, based on a living trust that she had drafted. However, years after she took out a reverse mortgage on the property, she moved to an assisted living facility, where she died. The changes in the home occupancy caused the lender to seek repayment and then evict one of the brothers who was living in the home.
Spouses may think they are allowed to live in the home after the borrower dies or moves out for other reasons, but that doesn’t always work out as planned.
One woman was not listed as a co-borrower on the reverse mortgage, because she was not 62 when her husband took out the loan. She had to retain an attorney to fight back against threatening letters and phone calls, after the death of her husband.
The federal Department of Housing and Urban Development, known as HUD, changed the rules for reverse mortgages in 2014. HUD provides insurance for reverse mortgages. The rule change ensures that a spouse may stay in the home, even if not listed as a co-borrower, subject to certain requirements.
Heirs must pay back the loan after the borrower dies or permanently leaves, and this has left more than one family in a bad place, especially if the house is in disrepair and must first be readied for sale.
While the reverse mortgage has some downsides, there are also benefits. Taking out a reverse mortgage allows the borrowers to refrain from taking assets from their retirement accounts, and if families have large unrealized gains on their property, they can tap the money without needing to sell the property.
An estate planning attorney can advise you on creating an estate plan that fits your unique situation and may include a reverse mortgage under the right circumstances.
Reference: Arizona Central (June 12, 2019) “Reverse mortgages can cause problems when spouses, heirs aren’t on board”