What to know about Reverse Mortgages

Dear Len & Rosie,

My parents have a reverse mortgage on their house due to some poor financial decisions made by my father through the years. They sold a house in Fremont for $690k in 2012, and acquired the house in Lodi through a reverse mortgage with only $100-200k in equity left over from the sale of the Fremont home. They make no payments. I understand they can stay in it until they die and only must pay property taxes. They live in a house in Lodi that I have fallen in love with. My dad made sure it is in a trust under my name with the belief that I will get it after the last one of them passes.

I believe the reality is that the bank will own it after the last parent is gone. I really love the house and want to stay in it after they pass. Will I have to buy it back from the bank just like any other buyer or can they reverse the reverse mortgage through a legal process and can I then take over the mortgage? I hope to buy it either way after knowing my best option. I will be a first time buyer.

Gabrielle

Dear Gabrielle,

You have a common misconception regarding reverse mortgages. It’s not nearly as bad as you think. The bank won’t own the home when your parents die. Instead, the loan is due and payable when your parents die or move out of the home.  At that time, the loan has to be paid off within six months of the surviving borrower's death.  It's also possible (but don't count on it) to get up to two 3-month extensions on the 6 month deadline.

The lender is to be paid the loan principal plus accumulated interest. The remaining equity in the home will belong to you as the beneficiary of your parents’ trust. If there is no remaining equity - that is, if the amount due is more than the value of the home, then all the lender gets is what the property sells for. They can’t come after you or your parents’ trust for anything.

After your parents die, the successor trustee of the trust, which is probably you, can execute and record an Affidavit of Death of Trustee adding you to the title to the home as trustee. After that, the trustee would execute and record a deed conveying the home to you. You can then apply for a loan directly from a bank or with the help of a mortgage broker.

Assuming that you can qualify for the home loan, you will wind up with the property. As an added bonus, you’ll get the property free of reassessment under Prop 13, which means you'll have the same tax bill as your parents.

Len & Rosie