Many elderly persons wish to remain in their own homes, but lack the financial means to do so. One option for such individuals is to take out what is known as a “home equity conversion mortgage,” commonly referred to as a “reverse mortgage.” Whereas a conventional mortgage requires the borrower to make monthly payments until the loan is repaid, with a reverse mortgage, all payments are deferred until the borrower dies or decides to sell the property.
Most reverse mortgages are regulated and insured by the U.S. Department of Housing and Urban Development (HUD). Under HUD rules, any person over 62 who resides in the house they own may qualify for a reverse mortgage. HUD maintains an online directory of qualified reverse mortgage counselors to advise individuals on the best way to obtain such loans.
Reverse Mortgages and Estate Planning
A reverse mortgage can significantly impact your estate planning. If your home is your principal asset, it is important to keep in mind that any reverse mortgage must be paid in full upon your death. This will reduce the amount of any inheritance you leave to your beneficiaries.
Your personal representative or executor must also be aware of the reverse mortgage, as he or she will likely be responsible for selling your house during probate in order to pay off the loan (or for finding other funds from the estate to do so). You must also consider the needs of other family members residing in your home at the time of your death. They may find themselves forced to relocate if the property is sold.
A recent California appeals court decision illustrates the difficulties that can arise from reverse mortgages. This case is provided for informational purposes only, and is not a statement of California law on the subject. A woman obtained a $300,000 reverse mortgage on her San Francisco residence where she lived with her daughter. Upon the woman’s death, the mortgage holder notified the daughter that the loan had come due. Within six months, the lender issued a notice of foreclosure.
The daughter, who by this point was the executor of her mother’s estate, attempted to halt foreclosure proceedings by arguing she was a victim of racial discrimination. She claimed the lender unfairly targeted her (and her late mother) because they were African-American. The California courts rejected this argument out of hand. The Court of Appeal said the daughter presented no evidence-beyond her own conclusions-that race discrimination played any role in the foreclosure. To the contrary, this was simply a case of a lender collecting a lawfully owed debt.
Planning Ahead
It is certainly understandable that a person faced with the loss of her home may feel unfairly targeted by a large commercial lender. But the truth is, a reverse mortgage is not free money. It is a loan tied to a specific asset that must be repaid upon the borrower’s death. That is why, if you or a close relative are thinking about taking out such a loan, you should speak with a qualified California estate planning attorney who can advise you on all the implications for your future estate. Contact the Law Office of Scott C. Soady today if you have any questions.