Answers to questions about Reverse Mortgages After Parents’ Death in New Jersey
This article was created by a New Jersey Probate Attorney.
What is a Reverse Mortgage in New Jersey?
A reverse mortgage is a home equity loan in which the borrower is not required to make payments. The homeowner must be at least 62 years old in order to qualify for a reverse mortgage. The loan accrues interest and doesn’t have to be repaid until the homeowner dies or moves out of the house.
The vast majority of reverse mortgages are federally backed Home Equity Conversion Mortgages (HECM). The Federal Housing Administration (FHA), a part of the Department of Housing and Urban Development (HUD), insures HECMs.
What happens when someone with a reverse mortgage dies in New Jersey?
A Reverse Mortgage, or Home Equity Conversion Mortgage (HECM) must be paid off when either the borrower or eligible non-borrowing spouse dies or if the home is no longer the principal residence of the borrower or eligible non-borrower.
In addition, if your children are heirs and are able to pay off your reverse mortgage loan, they may be able to keep your home after you die. (More on this below).
If your HECM loan was generated on or after August 4, 2014, than the non-borrowing spouse is allowed to remain in the home after the borrower dies provided they meet certain initial and ongoing requirements.
To qualify as an eligible non-borrowing spouse, you must:
- Be married to the borrower at the time of the loan closing and remain married to the borrower for his/her lifetime;
Note: If you marry the borrower after he/she takes out a HECM, you will not be eligible to remain in the home.
2. Be specifically named as a non-borrowing spouse in the HECM documents;
3. Occupy, and continue to occupy the home as your principal residence; and
4. The borrower must certify at the time of the loan closing, and each year thereafter, that you are his or her spouse; you must certify at the time of closing that you are an eligible non-borrowing spouse.
Will my children be able to keep my NJ home after I die if I have a reverse mortgage loan?
Provided your children are heirs and are able to pay off your reverse mortgage loan, they may be able to keep your home after you die.
How long do heirs have to pay off a reverse mortgage in New Jersey?
Heirs get an initial six months to deal with the loan payoff. However, it can be tricky to figure out exactly when your loan must be paid off. If you are the only borrower on the reverse mortgage (HECM) and:
- You live alone, your loan must be paid off when you die.
- You live with a spouse or partner, your loan generally must be paid off when you die. In some cases, your surviving spouse or partner may be able to continue living in the home after you die. Check with your lender or servicer as well as a housing counselor or attorney to find out if your spouse or partner is eligible for this benefit.
Caveat: If your heirs cannot afford to repay the loan from other funds and your spouse or partner does not qualify to continue living in the house, your spouse or partner will most likely have to move. (See: ‘To qualify as an eligible non-borrowing spouse.’)
- You live with children, other relatives, or unrelated roommates, your loan must be paid off when you die.
Caveat: If your heirs cannot afford to repay the loan from other funds, your children, other relatives, or unrelated roommates will most likely have to move.
4. If you are a co-borrower on the HECM reverse mortgage and:
5. You live alone because your co-borrower has died or already lives elsewhere, your loan must be paid off when you die.
6. You live with a spouse or partner who is a co-borrower on the reverse mortgage with you, your co-borrower can continue to live in the home after you pass away. But if they die too, your loan must be paid off.
7. You live with children, other relatives, or unrelated roommates. If your co-borrower is still living in the home your children, relatives, or unrelated roommates can continue to live there too when you die. But if your co-borrower dies, your loan must be paid off.
Caveat: If your heirs cannot afford to repay the loan from other funds, your children, other relatives, or unrelated roommates will most likely have to move.
What happens if the New Jersey property is underwater, or if the loan balance is more than the home is worth?
Many heirs may lack funds to pay off the loan balance, and therefore, may need to sell the home in order to repay the reverse mortgage. With an FHA-insured HECM loan, if the loan balance is more than the home is worth, your heirs don’t have to pay the excess. After your heirs sell the home, the lender will take the proceeds from the sale as payment on the loan, and the FHA insurance will cover any remaining loan balance.
If your heirs would like to keep your home instead of selling it, the loan must be paid off with another source of funds. But your heirs won’t have to pay more than the full loan balance or 95 percent of the home’s appraised value, whichever is less. More on this below.
I am an Heir to a New Jersey Property With a Reverse Mortgage, Does It Make Sense For Me To Keep or Sell the House?
When a property is subject to a reverse mortgage and the borrower dies the lender will send a federally approved appraiser to determine the property’s market value. Typically within 30 days of you notifying them of your relative’s passing. The amount that’s due to the lender is the lesser of the reverse mortgage loan balance or 95% of the appraised market value of the home.
For example, if the appraiser determines the home is worth $200,000 and the loan balance is $100,000. To keep the house, the heirs need to pay the loan balance of $100,000. If the house is sold, the heirs get any equity above the $100,000 loan balance.
However, if the home value has declined, and the loan now exceeds the home’s appraised value, say the home is appraised for $100,000, but the loan balance is $200,000. In order for the heirs to keep the home, they will have to pay $95,000 or 95% of the $100,000 market value. The heirs do not have to pay the full balance; the government insurance covers the remaining loan amount.
If the heirs decide to sell the property, it must be listed at no less than the appraised value. (The 5% difference helps defray the selling costs.) Because all sale proceeds go to pay off part of the loan and real estate fees, the estate receives no equity. The government insurance picks up the difference on the loan.
In the event that there is no potential equity, heirs may decide to simply hand the keys to the lender and avoid the hassle of trying to sell the home. This is also known as a “deed in lieu of foreclosure,” the heirs simply sign the deed over to the lender.
Finally, heirs can request up to two 90-day extensions. However, in order for heirs to receive the full year, they must show evidence that they are in the process of obtaining financing to keep the house, such as a pre-approval or mortgage commitment letter, or that they are actively trying to sell the house, such as providing a listing document or sales contract.
Contact an NJ Real Estate attorney who knows NJ Probate to answer any of your questions about NJ Reverse Mortgages at (844) 5 – DEFENSE – (973) 200-1111 or email us at INFO@FocusedLaw.com.
