My parents are both retired and primarily living on Social Security, supplemented by disbursements from my dad’s modest 401(k) savings. They’re thinking of getting a reverse mortgage, but my brother and I are worried about what will happen if they can’t make their payments. Would they be at risk of facing foreclosure? And what will happen to the home once it passes to the estate? Should my parents get a reverse mortgage and is it the “no risk” lending option that they think it is?
Dana L. in Albany, New York
Should My Parents Get a Reverse Mortgage
If your parents are considering getting a reverse mortgage, there are some things you should know about how this will affect their home and your estate. Learn what a reverse mortgage is, how it works and how a reverse mortgage may affect your inheritance and your parent’s estate.
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Maria A. Gaitan, Director of Housing Counseling & Community Outreach: Thanks for tuning in. If your parents are considering getting a reverse mortgage, this video will explain how this low-risk lending tool will affect their estate and the family’s inheritance.
First, the money received from a reverse mortgage is tax-free. Also, a reverse mortgage is repaid when the borrower dies, permanently moves from the residence or the property is sold. Most importantly, a reverse mortgage is a non-recourse loan, which means that your parent’s estate will not have to pay back any amounts owed that are in excess of the residual value of the home.
However, if your parents’ heirs do wish to keep the home, it is important to note that they don’t have to pay more than the full loan balance or 95% of the home’s appraised value, whichever one is less.
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Understanding why a reverse mortgage is a low-risk option for retired homeowners.
How a reverse mortgage will impact your parents as homeowners
A reverse mortgage is considered a low-risk financing solution for homeowners over the age of 62. It’s similar to a home equity loan in how much you can borrow, but without all the risk typically associated with taking out a second mortgage. The homeowner can borrow up to a certain percentage of the home’s value. This allows you to take advantage of the equity built up in the home to supplement retirement income.
The difference between a home equity loan and a reverse mortgage comes down to the risk of default and how the loan gets repaid.
What are the benefits of nonrecourse loan?
A nonrecourse loan means that a lender cannot hold a borrower liable for anything outside of the collateral attached to a loan. Since reverse mortgages are nonrecoure loans, it means homeowners will never be on the hook financially. So, no matter what happens with the property or the home’s value in the future, your parents are protected.
Reverse mortgages don’t have monthly payments
The other big benefit of a is that there are no monthly payments to worry about. There are typically no monthly payments as long as the home’s owners live in the home as their primary residence.
This means it basically limits the risk of foreclosure, because your parents can’t fall behind with their payments. In fact, there isn’t any risk of foreclosure as long as they:
- Stay in the home
- Maintain the residence in proper condition
- Pay taxes
Requirements to qualify for a reverse mortgage
- All borrowers must be at least 62 years of age
- All owners of the home must apply jointly
- The owners must occupy the home as their primary residence
When it comes to the property, single-family homes are always eligible for reverse mortgages. Some reverse mortgage programs may also accept condos, 2-4 unit dwellings such as duplexes and townhomes, and some manufactured homes.
How a reverse mortgage affects the estate and your inheritance
Since a reverse mortgage doesn’t have payments, the loan balance grows over time with interest and other charges. Once the homeowners both pass away or if your parents decide to move, the home gets sold. Then the proceeds from the sale are used to pay off the loan balance.
However, the balance due will never exceed 95% of the home’s appraised value. That means if you or one of the other inheritors wants to keep the home, you won’t be on the hook for an unreasonable amount of money to do so.
Still have questions about reverse mortgages? Talk to a HUD-certified housing counselor for more information.
