Reverse mortgages are often seen as a good way to help keep retirees in their homes even though their fixed income may not be enough to enable them to do that on their own. For those who are unfamiliar, a reverse mortgage is a process through which a bank or other financial institution will pay the homeowner in exchange for an interest in the value of the property. The loan does not need to be paid back until they leave the home or pass away, at which point their estate is often used to fund the repayment.
Unfortunately in many cases the estate may not have sufficient assets to repay the loan, which means that the lender will pursue its interest in the property to satisfy the debt (also known as a foreclosure). Under federal laws lenders must offer surviving interest holders the option to settle the loan for a percentage of the full amount. In reality this is often not what happens, leaving heirs in a difficult position trying to negotiate with lenders to save the property in the face of aggressive foreclosure threats.
In some cases lenders begin pursuing foreclosures just weeks after the original borrowers pass away, often before the family is able to react and gather resources to prevent the foreclosure.
These situations can be especially hard because family homes hold so much emotional significance. Children who are trying to negotiate their way out of a foreclosure left behind by their parents often feel the weight of saving the family legacy as they struggle with difficult finances and confusing legal documents.
Families in this situation should know that they have rights under federal and state regulations and that lenders must respect those rights.
Source: New York Times, “Pitfalls of Reverse Mortgages May Pass to Borrower’s Heirs,” Jessica Silver-Greenberg, March 26, 2014.