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Reverse mortgages can mean reversal of fortune for heirs, p. 3

We are wrapping up our discussion of the long arm of a reverse mortgage. A reverse mortgage is a loan against the equity in your house. To qualify, the homeowner must be 62 or older and must meet a few other conditions. The loan does not come due until the borrower dies or moves. We have been talking about how lenders are enforcing the loan terms when the borrower dies.

According to the Consumer Finance Protection Bureau, lenders are required by law to offer the borrower's heirs a chance to settle for a percentage of the loan amount. Borrowers' heirs say that such an offer would be the exception rather than the rule: Lenders have been demanding full payment before the estate has settled, and, if payment is not forthcoming, lenders have started foreclosure proceedings.

Lenders are also required to allow heirs up to 30 days from the date the loan comes due to figure out what they would like to do with the house. If an heir chooses to pay off the loan, he has, by law, as long as six months to work out the financing. Also, the heirs may not need to finance the full loan amount. They may choose to pay 95 percent of the home's fair market value -- not the loan balance -- as established by an appraisal (which the lenders pay for). In some cases, the 95 percent rule can save heirs tens of thousands of dollars.

There are cases, of course, that find heirs unable to meet the obligation without selling the house. If the home sells for more than the loan balance, the heirs keep the difference. If the home sells for less than the amount due, the heirs are not on the hook for the rest; federal insurance covers the difference. Reverse mortgage borrowers, by the way, pay into that federal insurance fund every month.

Heirs who want to keep the house -- like the nephew in our last post -- have to pay off the reverse mortgage. The CFPB says they should know, however, that nothing says they can't finance that payoff with a new mortgage. The terms of a new loan may well be more favorable.

Source: The New York Times, "Pitfalls of Reverse Mortgages May Pass to Borrower's Heirs," Jessica Silver-Greenberg, March 26, 2014

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