Protections for a Child in a Home with a Reverse Mortgage

Taking out a reverse mortgage is something you might consider if you’re interested in generating an additional stream of income for retirement. Reverse mortgages let homeowners access their equity without having to make payments to a lender, as long as they live in the home and use it as a primary residence.

If you take out a reverse mortgage and have adult children living in the home, it’s important to understand how they might be affected if something were to happen to you.

Reverse Mortgage Explained

A reverse mortgage is a type of loan that allows a homeowner to tap into their home equity without having to make payments to a lender. Reverse mortgages that are subject to Federal Housing Administration (FHA) rules are called home equity conversion mortgages (HECMs), as they allow homeowners to convert their equity into income.

Interest and fees are added to the reverse mortgage balance over time. As long as the borrower or co-borrowers continues to live in the home and uses it as a principal residence, no payment is due toward the balance. If the borrower or co-borrowers sells the home, moves out of the home, or passes away, the full balance must then be repaid.

In terms of who can get a reverse mortgage, lenders can set different eligibility requirements. There are specific guidelines for HECMs. To get this type of reverse mortgage, you must:

• Be age 62 or older
• Live in the home as a primary residence
• Have financial resources to pay property taxes, homeowners insurance, maintenance, and upkeep
• Not be delinquent on any federal debt
• You own the home outright or have paid down most of the mortgage
• Attend U.S. Department of Housing and Urban Development (HUD)-approved consumer counseling

Single-family and multifamily homes can be eligible for reverse mortgages. For example, if you own a duplex, you could take out a reverse mortgage on the property as long as you live in one of the units. Spouses can apply for a reverse mortgage together and be listed as co-borrowers, or if one spouse is ineligible, that spouse could be listed as an eligible non-borrowing spouse.

Adult Children and Reverse Mortgages

Reverse mortgages may not create any financial obligations for homeowners during their lifetime. But they can create financial responsibilities for their children once homeowners pass away.

A child who inherits a home that has a reverse mortgage on it—whether they live in that home or not—also inherits the debt. To keep the home, they would have to pay off the reverse mortgage using their own assets.

If the child doesn’t need or want to keep the home, they could sell it and use the proceeds to pay off the balance. This would clear the reverse mortgage debt and release them from any further financial obligations to the reverse mortgage company. Depending on what the home sells for and how much is owed, they also may be able to collect a capital gain.

Minor Children and Reverse Mortgages

Seniors who are raising grandchildren should consider how those children might be impacted by a reverse mortgage. A minor child could technically inherit the home if there are no other heirs before them. This could happen if a reverse mortgage borrower is raising their grandchild because that child’s parents have passed away. But does this make the minor responsible for the reverse mortgage?

Technically, no. But the same rules would apply with regard to the balance owed. That amount would have to be paid off for the child to remain in the home. For that reason, it may benefit reverse mortgage holders in that situation to talk to an estate planning attorney or a financial advisor about creating a financial safety net for a minor child for whom they’re caring.

Talking to Parents About Reverse Mortgages

If your parents are older and considering a reverse mortgage, you may want to initiate a discussion about what implications that might have for you. If you live in the home and your parents pass away, you would need to establish your right to remain in the home with the reverse mortgage company. Then you would have to deal with the issue of the reverse mortgage balance.

Parents can create some financial contingencies to avoid creating a financial burden for their children. These contingencies can include allocating money or other assets in a will or trust to pay off the reverse mortgage balance or taking out a life insurance policy for that purpose. Either one could help their children to avoid having to sell the home to pay off the reverse mortgage later.

You can also talk to your parents about the pros and cons of reverse mortgages in general, to help them decide if one is right for them financially. It’s possible that another option, such as an annuity, may be more appropriate for creating an additional stream of income for retirement without potentially putting their home on the line.

The Bottom Line

Reverse mortgages can create income for retirees, but they can result in headaches for children who may be living in the home. An adult child who inherits a home that has a reverse mortgage would need to pay off the balance to keep the home, though they’re not legally obligated to do so. If your parents have a reverse mortgage, it's important to be prepared for any financial obligations that they may leave behind once they pass away.