Introduction
A reverse mortgage is a means for elderly homeowners to pull funds from equity in their home without the need to make regular mortgage payments.[1] In a reverse mortgage, the lender provides funds to the homeowner in lump sum or periodic payments, and the homeowner does not have to repay the balance back unless or until certain events happen, such as their death or the sale of the home.[2]
A reverse mortgage lender is essentially taking the risk that the funds they front to the borrower in exchange for a mortgage on the property will be recoverable in the event of the sale of the home or through a foreclosure following the passing of the borrower.[3] Thus, if the proceeds from selling the home at foreclosure are insufficient to cover the balance of the loan, the lender is forced to accept a financial loss.[4]
When the borrower dies, the loan balance becomes due and payable. Under federal law, once this happens, the borrower’s eligible, non-borrowing spouse, the borrower’s estate, or the borrower’s heirs must either pay the outstanding loan balance (with interest), sell the home, provide the lender a deed in lieu of foreclosure, or correct any conditions that gave rise to the balance becoming due and payable.[5]
A borrower’s eligible, non-borrowing spouse is the spouse of the borrower at the time of closing and is not necessarily a borrower themselves. Non-borrowing spouses who meet certain qualifications can have payment of the loan balance deferred in the event the borrower dies.[6] In other words, in some instances, the surviving spouse of the borrower may remain living on the property after the borrower themselves pass.
Since the loan balance becomes due and payable after the borrower dies, reverse mortgages have a particular relevance for probate. This article will seek to dispel some misconceptions people may have about reverse mortgages.
The biggest myths of reverse mortgages and probate
FALSE: The borrower’s spouse will be left with the burden of repaying the loan balance
A borrower’s spouse can have repayment of the loan deferred indefinitely unless the spouse fails to meet certain qualifications. Under federal law the individual requesting deferment must have been the borrower’s spouse at the time of loan closing (when the reverse mortgage was first funded) and have remained the borrower’s spouse for the duration of the borrower’s lifetime.[7]
This individual must have been named as an eligible non-borrowing spouse in the mortgage and loan documents.[8] The spouse must also be using the home as their principal residence, or homestead.[9] Finally, the spouse must abide by any other requirements prescribed by the Federal Housing Commissioner.[10]
After the passing of the borrower, spouses requesting deferment must also establish their legal ownership over the home within 90 days of the death of the borrower and continue to satisfy any other obligations contained in the loan documents, such as maintaining homeowner’s insurance.[11]
FALSE: The Borrower’s heirs will eventually be left with the burden of repaying the loan balance
The lender’s recourse for repayment is limited to the property itself; in other words, the lender can usually only recover by selling the property.[12] The borrower’s heirs are responsible for repaying the loan balance only if they desire to keep the property, but aside from repaying the balance in full, the only other prescribed options for satisfying the loan is for the heirs to sell the home or provide the lender a deed in lieu of foreclosure.[13] Thus, the heirs are not liable for the full amount of the loan if they do not have the ability to pay it in full or if they do not wish to keep the property.
In fact, if there is a foreclosure and the foreclosure price exceeds the loan and cost of foreclosure, the borrower’s heirs may be entitled to the surplus.[14] However, since interest still accrues on the mortgage and no one is paying that interest during the life of the borrower, many reverse mortgage foreclosures never see a surplus after foreclosure.
FALSE: Taking out a reverse mortgage is tantamount to signing the home away
The home will still pass to the borrower’s estate or heirs upon the borrower’s passing.[15] Under a reverse mortgage, when the balance becomes due and payable, the heirs of the home have the option to repay the balance in full instead of selling the home.[16] The borrower’s heirs may still keep ownership of the property. The lender also cannot foreclose on the home if it is occupied by an eligible non-borrowing spouse who has deferred repayment.[17]
In a typical foreclosure action, when the fair market value of the property does not cover the entirety of the outstanding balance, the lender is entitled to the difference.[18] This is called a deficiency judgment. Reverse mortgages insured by the Department of Housing and Urban Development are required to have provisions barring the lender from obtaining a deficiency judgment.[19]
If the proceeds of a foreclosure sale are higher than the balance of the loan, then the distribution of this surplus is governed by statute.[20] Under Florida law, the owner of record is entitled to this surplus.[21] The owner of record is the person who “appear[s]” to be the owner of the foreclosed property on the day the lis pendens is filed; a plaintiff merely needs to allege they are the owner.[22]
As the owners of a property under a reverse mortgage at the time the lender would file for foreclosure, the heirs of the borrower would be entitled to the surplusage from the sale, if any.
FALSE: Reverse mortgage lenders are untrustworthy
There are several safeguards in place to ensure trustworthiness in the mortgage transaction. However, these protections only apply to reverse mortgages which are insured by the Department of Housing and Urban Development.[23]
The provisions of these mortgages are required by federal law to ensure the transaction’s transparency.[24] Before the mortgage can be issued, the lender is required to assess the would-be borrower’s financial capacity.[25]
The lender is required to direct the would-be borrower to Federal Housing Authority approved counselors who will inform them of their rights and obligations under a reverse mortgage agreement.[26]
Homeowners who wish to take out a reverse mortgage are required to undergo this counseling.[27] Thus, homeowners will be equipped with the knowledge they need to assess whether a reverse mortgage is right for them and to assess whether their mortgage lender is complying with federal law.
Conclusion
Reverse mortgages may seem too good to be true, but they are a legitimate source of funds for seniors in their twilight years. With competent legal help, a senior can determine if a reverse mortgage is right for them and ensure all goes well while taking out a reverse mortgage.
[1] See Reverse Mortgage Solutions, Inc. v. United States, 365 F.Supp.3d 931, 936 (N.D. Ill. 2019).
[2] Id.
[3] See Id.
[4] See Id.
[5] See 24 C.F.R. § 206.125(a)(2) (2022).
[6] See 24 C.F.R. § 206.3 (2022).
[7] 24 C.F.R. § 206.55(c)(1)(i) (2022).
[8] 24 C.F.R. § 206.55(c)(1)(ii) (2022).
[9] 24 C.F.R. § 206.55(c)(1)(iii) (2022); for applicable definition of “principal residence,” see 24 C.F.R. § 206.3 (2022).
[10] 24 C.F.R. § 206.55(c)(1)(iv) (2022).
[11] 24 C.F. R. § 206.55(d) (2022).
[12] 24 C.F.R. § 206.27(b)(8) (2022) (“The mortgagee shall enforce the debt only through sale of the property”).
[13] See 24 C.F.R. § 206.125(a)(2) (2022).
[14] See, e.g., Fla. Stat. § 45.033 (2022).
[15] See 24 C.F.R. § 206.125(a) (2022) (indicating that when the balance becomes due and payable the borrower’s estate or heirs are to be notified of the due and payable balance); see also 24 C.F.R. § 206.27(c)(1) (2022) (indicating that the outstanding loan balance becomes due and payable upon the death of the borrower).
[16] See 24 C.F.R. § 206.125(a)(2) (2022).
[17] See 24 C.F.R. § 206.55(a) (2022) (establishing that the balance does not become due and payable during an eligible non-borrowing spouse’s deferral period); see also 24 C.F.R. § 206.55(c)(1) (2022) (establishing that a non-borrowing spouse is eligible for a deferral if they occupy the home as their principal residence).
[18] 37 Fla. Jur 2d Mortgages, Etc. § 370.
[19] 24 C.F.R. § 206.27(b)(8) (2022).
[20] See Fla. Stat. § 45.032 (2022).
[21] Fla. Stat. § 45.032(2) (2022) (“There is established a rebuttable legal presumption that the owner of record on the date of the filing of a lis pendens is the person entitled to surplus funds . . .”).
[22] Fla. Stat. § 45.032(1)(a) (2022) (“’Owner of record’ means the person or persons who appear to be owners of the property that is the subject of the foreclosure proceeding on the date of the filing of the lis pendens. In determining an owner of record, a person . . . may rely on the plaintiff’s allegation of ownership. . . ”).
[23] In re D’Alessio, 587 B.R. 211, 218 (Bankr. D. Mass. 2018) (finding that federal regulations only specify when a reverse mortgage may be insured by HUD and do not directly regulate mortgages).
[24] See 24 C.F.R. § 206.27 (2022) (laying out the required provisions for a reverse mortgage agreement).
[25] See 24 C.F.R. § 206.37 (2022).
[26] See 24 C.F.R. § 206.41 (2022).
[27] 24 C.F.R. § 206.41(a) (2022) (“The borrower, any Eligible or Ineligible Non-Borrowing Spouse, and any non-borrowing owner must receive counseling”).