- It closed after August 4th 2014, AND
- There is a surviving spouse, who was not named on the existing mortgage (a non-borrowing spouse), who still lives in the property.*
A reverse mortgage becomes due and payable when the last borrower named on the original contract dies, unless:
If there is no surviving non-borrowing spouse, the reverse mortgage becomes due and payable. However, common sense dictates that the heirs can't possibly refinance or sell the home on the day of death to satisfy the debt, so reverse mortgage contracts stipulate that the lender must allow 30 days for the heirs to decide how they wish to proceed. They are not required to sell the home to pay off the reverse mortgage, but if they want to keep the property, the heirs have to pay off the loan. After it is decided how the debt will be satisfied, most lenders will allow an additional 6 months for the heirs to come up with the money, obtain alternative financing or sell the property.
When heirs choose to sell, they are free to decide on their own real estate broker, manage the sale and keep any capital gains remaining after the reverse mortgage balance has been satisfied and transaction closing costs have been paid. The borrower's personal belongings and furnishings can be removed, but fixtures, as defined by state law, cannot.
If the heirs decide to retain the property, the reverse mortgage lender will order an appraisal to establish market value. If the property is worth less than the total amount owed, the heirs are only required to pay ninety-five percent of the appraised value to satisfy the debt in full. These mortgages are non-recourse, so neither the heirs nor any other assets of the borrower’s estate are held liable for paying any amount owed above 95% of market value of the property.
Lenders will generally send annual occupancy letters to borrowers. They also monitor the Social Security Death Index as well as watch databases that keep track of property taxes and homeowner’s insurance payments. If they don't receive a reply to the annual occupancy letter or the property taxes and/or the homeowners insurance go delinquent, they may contact next of kin, search other records or send an inspector to the property in person.
Your Reverse Mortgage equity line credit limit is determined by your age and the interest rate at the time you apply, but the rate has far more effect than your age. As the table below shows, at a rate of 5% the credit limit for a 62-year old is almost 5 times higher than at a rate of 10%. And the younger you are the more the rate matters. At a rate of 10% the credit limit is 80% lower for a 62-year old but just 40% lower for a 92-year old.
The credit limit on a Reverse Mortgage also increases a bit each month, but how much depends on interest rates, and the recent drop in rates has created a unique window of opportunity. Applying while rates are still low will get you a higher credit limit, which will increase faster as rates rise. If rates rise before you apply, your credit limit may be drastically reduced and may also be raised more slowly.
Retirees are living longer and outliving savings is now a major concern. It is widely accepted that withdrawing more than 4% of retirement savings per year drastically increases the chance that it will run out in less than 30 years. But many retirees find that unexpected expenses make it impossible to avoid doing just that.
The conventional wisdom is to view home equity as a “last resort” to be used only if and when savings are exhausted. But research done by Drs. Barry H. Sacks, J.D., Ph.D. and Stephen R. Sacks, Ph.D shows that reversing that passive strategy by setting up a standby reverse mortgage line of credit is a much more effective way to ensure your savings will last your lifetime. The idea is to draw from the line of credit for expenses exceeding 4% of your savings, which preserves capital during the critical early years of retirement. This approach has been demonstrated to be much safer and more effective under a wide range of conditions and may even leave you a higher net worth to pass on to your heirs. The original Wall Street Journal article can be downloaded here:
On November 21st of this year HUD announced that it will be implementing the financial assessment requirement for Reverse Mortgages as of March 2, 2015. The purpose of the assessment is to determine whether or not an impound account will be required for property taxes and hazard insurance.
This is important to know if your credit is less than perfect and you are considering a Reverse Mortgage in the future, as it may affect the amount of cash available at close or the term/tenure payments available. No financial assessment will be required until then.
On November 10th of this year the FHA announced new seasoning requirements when paying off traditional mortgages using a Reverse Mortgage. Any loans to be paid off must now have been in place for at least 12 months prior to applying for the new Reverse Mortgage.
This is important news for anyone who will be using a Reverse Mortgage to pay off an existing mortgage or line of credit. If you need cash now and you plan to get it by refinancing with a standard mortgage or by taking out a Home Equity Line of Credit, you’ll need to wait at least one year before you can pay them off using a Reverse Mortgage.
A new Reverse Mortgage program is now available, which significantly reduces the maximum interest rate on Adjustable-Rate Reverse Mortgages and decreases the frequency of interest rate changes. The rate changes only once per year and cannot rise or fall more than 2% and the highest the rate can ever rise is only 5% above the start rate. If the maximum interest rate on your current Reverse Mortgage is more than 7% you should call (714) 603-9791 and ask about the HECM Cap 5 program. You also may be eligible to:
The landmark case of Bennett et al. v. Donovan changed the rules for Reverse Mortgages for married borrowers where one spouse is not named on the mortgage. For all loans closed after August 4, 2014 a surviving spouse who is not named as a borrower may stay in the home for life without triggering the payoff requirement.
A Non-Borrowing Spouse or NBS is a spouse who is less than 62 years of age and therefore not eligible to be named as a borrower on a Reverse Mortgage. For FHA-Insured Home Equity Conversion Mortgages closed after August 4, 2014 such borrowers may be allowed to remain in the subject property even after the named borrower passes away. However, it is important to bear in mind that there are very specific requirements that must be met, which include, but are not limited to the following:
For more details please see the criteria listed in Mortgagee Letter 2014-07
*Please click here to see important information about when a Reverse Mortgage may become due and payable
ABOUT THE Author
Michael Melody has been a Mortgage professional in Southern California since
1990. Now based in Huntington Beach, Kevin assists buyers and sellers of
residential property with all their financing needs, with a special emphasis on
"Old School" personal service. He uses his more than two decades of
experience in mortgage lending and residential Real Estate to take his clients
from start to finish on any type of transaction. Sellers can take advantage of
his intimate knowledge of financing to pre-screen buyers and offer creative
solutions for self-employed individuals, business owners and otherwise
well-qualified buyers who may not fit traditional lending guidelines. He also assists
homeowners looking to refinance to a better rate or lower payment, consolidate
debts or get cash for home improvements, and even families whose homes are
underwater can be helped under Fannie Mae's Home Affordable Refinance Program
(HARP) and Freddie Mac's Open Access Relief Refinance for owner-occupied
single-family homes, condos, manufactured homes, and 2-4 unit residential
income properties, as well as vacation homes, rentals and investment property.
Kevin is a proud veteran of the United States Air Force, and author of the 2001
book "What Lenders Don't Want You To Know."