A reverse mortgage is a type of loan available to an individual borrower who is more than 62 years of age and who has sufficient equity in his or her primary residence. A reverse mortgage allows a borrower to cash out the equity in his or her house, in exchange for a lump sum or monthly payments, without making any immediate payments back to the lender. The lender is not entitled to repayment until the borrower dies, the property is sold, or the house is no longer used as the borrower's primary residence.
All of that seems very straightforward, but what actually happens after the death of the borrower? Oftentimes, children may expect to inherit their parents' real estate and they may not even know that their parents had taken reverse mortgages later in life. There are very specific rules dealing with the timelines and payoff procedures which, if not followed, can lead to a mortgage foreclosure lawsuit. Children of parents who die with reverse mortgages risk losing the family home if they are not aware of their rights.
Under federal regulations governing reverse mortgages, heirs have up to 30 days from when the loan becomes due to determine what they want to do with the property, and up to six months to arrange financing. More importantly, there is a rule that allows heirs to pay 95 percent of the current fair market value of the property for a release of the mortgage. The difference offered by the 95 percent rule can be critical. Following the financial crisis, the disparity between the current value of a home and the total balance on the mortgage can often mean the difference between keeping a home and losing it to foreclosure.
If you are dealing with a reverse mortgage lender following the death of a parent, you may wish to consult an attorney to make sure that you understand all of your options.
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