A debtor recently blogging on a bankruptcy website shared with a group that his Grandmother had recently died and left him one fourth of her estate as an inheritance. The asset value was small and her house was the only large item left in the estate. The house had a reverse mortgage securing the house. The debtor, considering filing for bankruptcy, wanted to know whether to wait on his Grandmother’s estate to be settled or to go ahead and file. He had learned he had a $12,000 exemption if he filed for bankruptcy protection.
For those of you facing bankruptcy and have an inheritance of a house that has a secured reverse mortgage, you really need to understand what a reverse mortgage is before you file.
The Reverse Mortgage
A reverse mortgage is a loan made to a homeowner or homeowners who are over 62 years of age that qualify. They are made against the equity owned in the home and work in a reverse direction than a normal mortgage loan. Instead of reducing the debt by making payments, the recipient of a reverse mortgage gets paid a lump sum based upon the youngest homeowner’s age and never makes any more payments.
The homeowners receive the lump sum tax free and can do what they will with the funds. The mortgage loan continues to increase with interest until the last homeowner dies or sells the property.
When the last homeowner dies, the heirs to the estate have one year in which to sell the house or give it back to the mortgage company. Since the reverse mortgage loan is backed by the US Government and since the US Government’s interest in the house is backed by insurance the homeowner pays, there is really not much risk involved in making these types of loans for any of the entities involved.
The heirs who received the inheritance are not responsible for the loan or house if there is no equity when they sell it. The heirs get what equity is left in the house upon selling it, but they do not have to even sell it if it is an undervalued house at time of sell. In any regards, the reverse mortgage loan is to be satisfied upon sell or return of the house.
The mortgage company does not lose money because it is guaranteed principal plus interest of its loan by the US Government no matter how much the house sells. The US Government cannot lose money because it is guaranteed a return on its investment by the insurance company. The insurance company will not lose money because its actuaries base the amount of the reverse mortgage on death and housing statistics. Virtually, most always, no one loses.
The reverse mortgage plan is a great plan for seniors who are experiencing a downfall on finances at retirement age. Not having to make a house payment is big for most seniors during this time, and the lump sum of money comes in handy.
An heir facing bankruptcy may want to realize that reverse mortgage loans are increasing daily, so in a housing market like ours, the equity is also decreasing daily. Many reverse mortgages today are seeing negative equity due to loss of value in homes. Not to worry. Just sale the house or not, and feel free to file for bankruptcy protection.
- An Alternative Means for Buyers Over 62 to Finance a Home Purchase (buynycsell.wordpress.com)
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