Reverse mortgages are supposed to help people. They allow a borrower over the age of 62 to tap into the equity of their home and use the money to supplement his or her income, pay down debt, or cover some major expenses. The money doesn't have to be paid back until the borrower either moves out or dies. However, the surviving children and other heirs of borrowers are finding that some of the "helpful" lenders are playing loose and free with the repayment laws, forcing the properties into foreclosure soon after the deaths of borrowers - and possibly violating the law.
If your elderly parent took a reverse mortgage out before he or she died, here's what you should know about your rights.
You Cannot Be Forced To Pay More Than The House Is Worth
You can still inherit your parent's house, even if he or she took out a reverse mortgage. You also inherit, however, the mortgage that's owed - if you choose to accept the responsibility of paying it off in order to get the house.
For heirs that have no interest in the property, the easiest thing to do is to let turn the keys over to the bank from the estate in a move that's known as a deed-in-lieu of foreclosure. However, if the heirs do want the property, they have options. The lender has 30 days after being notified of the borrower's death to have the home appraised. After that, to keep the home, the heirs have to repay the lesser of the reverse mortgage loan balance or 95% of the home's current fair market value.
The fact that heirs only have to repay the up to 95% of the home's current fair market value is of critical importance because many reverse mortgages were taken out when the homes' values were higher. That means that if the reverse mortgage is worth $300,000 on a $200,000 home, the heirs are only obligated to pay off $190,000 of debt in order to keep the house. Lenders have to give heirs 6 months to come up with financing to pay off the loan in order to keep the house.
Not All Lenders Are Upfront About Your Options
Unfortunately, not all lenders are informing heirs of their options, and the heirs who don't know the law end up overpaying on what's owed. Or they end up losing the family house to foreclosure because they think they have to repay the full amount of a loan on a property that has since devalued.
In addition, many heirs don't realize that the lenders don't have the right to deficiency judgments against the estate if the house is foreclosed upon. This is causing some frustrated (and scared) heirs to turn the keys of their parent's home over to the lender early, instead of trying to refinance it or sell it themselves.
There have also been reports of lenders intentionally delaying appraisals (to take advantage of rising property rates), or inflating the appraisals so that heirs have to pay more than what's fair. There are also numerous reports of lenders who are simply unresponsive to requests from heirs who are trying to work through what should be the simple process of redeeming the reverse mortgage taken by their parents.
If you find yourself dealing with a stack of foreclosure notices due to a reverse mortgage taken by your parent before he or she died, consider hiring a foreclosure defense attorney to help you preserve your rights to the property. One who specializes in handling foreclosure issues may be the most helpful - especially if you suspect that the lender isn't willingly going to obey the laws that are designed to protect consumers like you.