Protections for a Child In a Home With a Reverse Mortgage
Taking out a reverse mortgage is something you might consider if you’re interested in generating an additional stream of income for retirement. Reverse mortgages allow homeowners to access their equity without having to make payments to a lender, as long as they live in the home and use it as a primary residence. If you take out a reverse mortgage and have adult children living in the home, it’s important to understand how they might be affected if something were to happen to you.
- Reverse mortgages are special borrowing arrangements that allow eligible homeowners to access their equity.
- A reverse mortgage is different from a home equity loan, which is a second mortgage that requires payments to be made according to a set schedule.
- Children, relatives, and other dependents who are living in a home with a reverse mortgage but are not listed as co-borrowers will have to pay off the balance to remain in the home.
- Adult children who inherit a home that has a reverse mortgage will have to pay it off in order to keep the home.
Reverse Mortgage Explained
A reverse mortgage is a type of loan that allows a homeowner to tap into their home equity, without having to make payments to a lender. Reverse mortgages that are subject to Federal Housing Administration (FHA) rules are called home equity conversion mortgages (HECMs), as they allow homeowners to convert their equity into income.
Interest and fees are added to the reverse mortgage balance over time. As long as the borrower or co-borrowers continue to live in the home and use it as a principal residence, no payment is due toward the balance. If the borrower or co-borrowers sell the home, move out of the home, or pass away, the full balance must then be repaid.
In terms of who can get a reverse mortgage, lenders can set different eligibility requirements. There are specific guidelines for HECMs. To get this type of reverse mortgage, you must:
- Be age 62 or older
- Live in the home as a primary residence
- Have financial resources to pay property taxes, homeowners’ insurance, maintenance and upkeep
- Not be delinquent on any federal debt
- Own the home outright or have paid down most of the mortgage
- Attend HUD-approved consumer counseling
Single-family homes and multi-family homes can be eligible for reverse mortgages. If you own a duplex, for example, you could take out a reverse mortgage on the property as long as you live in one of the units. Spouses can apply for a reverse mortgage together and be listed as co-borrowers or, if one spouse is ineligible, that spouse could be listed as an eligible non-borrowing spouse.
You cannot add someone to a reverse mortgage that you’ve already taken out.
Adult Children and Reverse Mortgages
Reverse mortgages may not create any financial obligations for homeowners during their lifetime. But they can create financial responsibilities for their children once they pass away.
A child who inherits a home that has a reverse mortgage on it—whether they live in that home or not—also inherits the debt. To keep the home, they’d have to pay off the reverse mortgage using their own assets.
If the child doesn’t need or want to keep the home, they could sell it and use the proceeds to pay off the balance. This would clear the reverse mortgage debt and release them from any further financial obligations to the reverse mortgage company. Depending on what the home sells for and how much is owed, they may also be able to collect a capital gain.
If you have a home equity conversion mortgage, your heirs will have to repay either the full loan balance or 95% of the home’s appraised value, whichever is less.
Minor Children and Reverse Mortgages
Seniors who are raising grandchildren should consider how those children might be impacted by a reverse mortgage. A minor child could technically inherit the home if there are no other heirs before them. This could happen if a reverse mortgage borrower is raising their grandchild because that child’s parents have passed away. But does this make the minor responsible for the reverse mortgage?
Technically, no. But the same rules would apply with regard to the balance owed. That amount would have to be paid off in order for the child to remain in the home. For that reason, it may benefit reverse mortgage holders in that situation to talk to an estate planning attorney or financial advisor about creating a financial safety net for a minor child they’re caring for.
Talking to Parents About Reverse Mortgages
If your parents are older and considering a reverse mortgage, you may want to initiate a discussion about what implications that might have for you. If you live in the home and your parents pass away, you’ll need to establish your right to remain in the home with the reverse mortgage company. You’d then have to deal with the issue of the reverse mortgage balance.
Parents can create some financial contingencies to avoid creating a financial burden for their children. These contingencies can include allocating money or other assets in a will or trust to pay off the reverse mortgage balance or taking out a life insurance policy for that purpose. Either one could help their children to avoid having to sell the home to pay off the reverse mortgage later.
You can also talk to your parents about the pros and cons of reverse mortgages in general, to help them decide if one is right for them financially. It’s possible that another option, such as an annuity, may be more appropriate for creating an additional stream of income for retirement without potentially putting their home on the line.
How Does a Reverse Mortgage Affect Your Children?
If you have a reverse mortgage and your children inherit your home after you pass away, they’ll be responsible for paying the balance due. This may require them to sell the home if they aren’t able to pay off the reverse mortgage using other financial resources.
Can Heirs Walk Away From a Reverse Mortgage?
Heirs can opt not to pay a reverse mortgage. But if they choose to do so the reverse mortgage company can initiate a foreclosure in order to take possession of the home.
What Happens If You Inherit a House With a Reverse Mortgage?
If you inherit a house with a reverse mortgage, you’ll need to pay off the balance in order to keep the home. If you do not wish to keep the home, you could sell it in order to clear the reverse mortgage balance. Any profits left after paying off the mortgage would then be yours.
The Bottom Line
Reverse mortgages can create income for retirees but they can result in headaches for children who may be living in the home. An adult child who inherits a home that has a reverse mortgage would need to pay off the balance to keep the home, though they’re not legally obligated to do so. If your parents have a reverse mortgage, it’s important to be prepared for any financial obligations they may leave behind once they pass away.