Health & Age Concerns
One of the issues that often make reverse mortgages more complex than conventional loans is the health of the borrower(s). Since the user of this product is an older American, there can often be health issues that factor into how the loan will be established. Let’s review some different scenarios;
Healthy parent (adult child has power of attorney)
While it is often the desire of your parent to have you handle the reverse mortgage process, that is not acceptable to HUD or lenders. You can do a lot of the fact finding and initial legwork, and can assist throughout the process. Your parent, the actual reverse mortgage customer, will need to complete the application/counseling and sign for his/herself. The same goes for the closing.
Limited physically, mentally healthy
The physical limitations can vary greatly; partial paralysis due to stroke, macular degeneration, rheumatoid arthritis, etc. If your parent cannot sign a lengthy set of documents for his/herself, a mark (usually initials) can be allowed. If that still proves to be difficult, a power of attorney can be used. Your parent will still need to sign a small handful of documents. The rest, including the entire closing package, can be signed by you, the POA. A letter of explanation will be required by the lender and often a doctor’s note.
The most complex situations involve mental incapacity due to stroke, dementia, and Alzheimer’s. In one of those situations, there will need to be a power of attorney, guardian, or conservator. Guardianship and conservatorship are issued through the court system and are required when a POA was not in place before the incapacity.
The guardian or conservator will need the judge’s permission to move forward with the reverse mortgage. If the POA was in place before the incapacity, you will be allowed to sign the entire application and closing package for your parent. The lender will require a letter of explanation from the POA. They will also want a doctor’s note stating the reason for the mental incapacity and the date that judgment was made by the physician. They will want to make sure that the customer executed the POA while of sound mind.
Two parents, but only one is healthy
Generally speaking, if one parent is mentally incapacitated, the rules are very similar to the above. The only exception is if the incapacitated parent was never on title to the house, and/or does not live in the property as his/her primary residence. In those cases, the healthy parent can sometimes move forward without the incapacitated spouse. It also depends on the state and whether community property rules apply.
Will I still Receive an Inheritance?
Your parents’ home may appreciate in value while they tap into their equity, which could leave some equity when the loan ends. It will also depend on how quickly the funds are used, whether they were all used, and what the interest rate was for the life of the loan. It is important to remember that the reverse mortgage allows your parents to live in comfort without having to depend on family members to support them.
How much money will they owe when it is time for the loan to be repaid? And can we be on the hook for any negative equity?
Your parents are responsible for paying back the total amount that they borrowed as well as any accrued interest and mortgage insurance. If the last borrower has passed away, the executor of the estate will repay the loan, typically by selling the property. If you wish to retain the property, you can pay cash or refinance the debt. There are a couple of options if the home is underwater, but since the loan is non-recourse, no one is responsible for paying back more than the home can be sold for.
What happens to my parents’ home if they move into assisted living, a nursing home, or in with us?
They will continue to accrue interest and mortgage insurance until they sell the home, no longer occupy it as a primary residence, or pass away. Regardless of what you decide to do with the house, the reverse mortgage becomes due and payable when your parents move out permanently. When the loan is called due, the period of time to repay the loan is six months with two three-month extensions being granted when in regular communication with the loan servicer.