Who Owns The House In A Reverse Mortgage: A Simple Guide

Introduction

Purchasing a home is often seen as a significant achievement, a place to build memories, and a source of security for the future. However, for some older homeowners, maintaining their financial well-being can become challenging. To address this, reverse mortgages have become a viable option. But who owns the house in a reverse mortgage? Reverse mortgages can be a useful financial tool for seniors who are looking to supplement their retirement income. These loans allow homeowners aged 62 and older to convert a portion of their home equity into tax-free cash without giving up ownership of their home. In this comprehensive article, we’ll explore the concept of house ownership in a reverse mortgage, delve into the three types of reverse mortgages, provide a real-life example, and discuss what happens when you inherit a house with a reverse mortgage.

Who Owns the House in a Reverse Mortgage?

A reverse mortgage is a financial product designed to help older homeowners access a portion of their home’s equity while still living in it. The question of house ownership in a reverse mortgage is a common one, and the answer lies in understanding how reverse mortgages work.

In a traditional mortgage, you borrow money from a lender to purchase a home, and you gradually build equity in the property as you make mortgage payments. Ultimately, you fully own the house when the mortgage is paid off. However, in a reverse mortgage, the ownership dynamic is different.

With a reverse mortgage, you essentially convert a portion of your home’s equity into loan proceeds that you can receive in various ways, such as a lump sum, monthly payments, or a line of credit. The key distinction is that you retain ownership of the house during the life of the loan. In other words, you continue to own and live in your home just as you did before obtaining the reverse mortgage.

The ownership remains with you as long as you meet the requirements of the reverse mortgage, which typically include:

1. Primary Residence: You must continue to live in the home as your primary residence. You can’t use a reverse mortgage for a vacation home or investment property.
2. Home Maintenance: You are responsible for maintaining the property, paying property taxes, homeowners insurance, and any other obligations associated with homeownership.
3. Loan Repayment: The loan becomes due when the last surviving borrower permanently leaves the home or passes away. At this point, the loan must be repaid.

It’s important to note that because you maintain ownership of the house, you have the flexibility to sell it at any time. When you sell the home, the reverse mortgage loan balance must be repaid, and any remaining proceeds from the sale belong to you or your heirs.

What Are The 3 Types of Reverse Mortgages

Now that we’ve established that you maintain ownership of your home in a reverse mortgage, let’s explore the three main types of reverse mortgages:

1. Home Equity Conversion Mortgage (HECM):

HECMs are the most common type of reverse mortgage and are insured by the Federal Housing Administration (FHA). They offer flexibility in how you receive funds, including a line of credit, monthly payments, or a lump sum. To qualify for an HECM, you must be at least 62 years old, live in the home as your primary residence, and meet specific financial eligibility criteria.

2. Proprietary Reverse Mortgage:

Proprietary reverse mortgages are not government-insured and are offered by private lenders. They are typically available to homeowners with higher home values. These loans may offer larger loan amounts, but the terms and eligibility requirements can vary from lender to lender.

3. Single-Purpose Reverse Mortgage:

Single-purpose reverse mortgages are often offered by state or local government agencies or nonprofit organizations. They are designed for specific purposes, such as covering property taxes or making necessary home repairs. These loans are typically the most affordable option but come with restrictions on how the funds can be used.

Each type of reverse mortgage has its own set of rules, benefits, and considerations. It’s essential to carefully evaluate your needs and consult with a qualified financial advisor to determine which option is the best fit for your situation.

A Real-Life Reverse Mortgage Example

To illustrate how a reverse mortgage works, let’s consider an example:

Meet John and Mary:

John and Mary, both in their late 70s, own their home, which is valued at $300,000. They are comfortable in their home but could use some extra income to cover medical expenses and other living costs. They decide to explore a reverse mortgage.

Reverse Mortgage Details:

John and Mary opt for an HECM reverse mortgage. Based on their age and home value, they are eligible for a maximum loan amount of $200,000. They choose to receive the funds as a line of credit, which allows them to access money when needed.

Over the next few years, John and Mary draw on their reverse mortgage line of credit to cover medical bills, home repairs, and other expenses. They do not make monthly mortgage payments because the reverse mortgage allows them to defer repayment until they leave the home permanently.

What Happens When John and Mary Move:

Several years later, John and Mary decide to move to an assisted living facility due to health concerns. At this point, the reverse mortgage becomes due because they are no longer living in the home as their primary residence.

John and Mary sell their home for $350,000, and the reverse mortgage loan balance is approximately $250,000, including accrued interest and fees. After repaying the reverse mortgage, they have $100,000 left from the home sale proceeds. This money belongs to John and Mary, and they can use it as they see fit.

In this example, John and Mary retained ownership of their home throughout the reverse mortgage period and were able to access their home equity to improve their quality of life. When they decided to move, they sold the house, repaid the loan, and had funds left for their future needs.

What Happens if You Inherit a House with a Reverse Mortgage?

If you inherit a house with a reverse mortgage, the process can vary depending on your relationship to the borrower and how you choose to handle the situation:

1. Spouse as a Co-Borrower: If you are the surviving spouse and a co-borrower on the reverse mortgage, you can continue to live in the home without repaying the loan. The loan only becomes due when you permanently leave the home.

2. Non-Borrowing Spouse: If you are a non-borrowing spouse (not listed on the reverse mortgage), you may be able to remain in the home after the borrower passes away, but you will need to repay the loan balance or purchase the home at its current market value.

3. Heirs: If you are an heir to the property, you have several options:

• Sell the Home: You can choose to sell the home and use the proceeds to repay the reverse mortgage. Any remaining funds belong to the heirs.
• Refinance the Loan: Heirs can refinance the reverse mortgage into a traditional mortgage to retain ownership of the home.
• Deed in Lieu of Foreclosure: If the home is underwater (worth less than the loan balance), heirs can choose to give the home back to the lender through a deed in lieu of foreclosure, avoiding the responsibility of repaying the loan.
• Foreclosure: If heirs do not take any action to repay the loan or sell the home, the lender may initiate foreclosure proceedings to recover the loan balance.

The approach you choose will depend on your financial situation.