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

Property Tax Exclusion

Dear Len & Rosie,

My mother passed away at the age of 91. Her home has her name and my name as tenants in common with full rights of survivorship. We have lived in this home together. It was the home where I was raised. We all had a wonderful relationship together. Should I remove her name from the property tax bill and have my name added? Will my taxes go up? It has been a long year missing my mother and I suppose it is now time to find out what I should do with the name change on the property tax bill and deed.

Therese

Dear Therese,

You shouldn’t have to worry about property tax. Under Proposition 58, your mother may transfer to her children her home and up to $1,000,000 of other real property in California without triggering a property tax reassessment. If you reside in your mother’s home, your property tax won’t be any different from what it was before your mother’s death.

In order to avoid reassessment, you will have to submit to the County Assessor a form called “Claim for Reassessment Exclusion for Transfer Between Parent and Child.”  If the Assessor is notified of your mother’s death by the vital statistics office that issues death certificates, they will usually mail the form to you.

The bad news is that your description of the state of title to your mother’s property, “tenants in common with full rights of survivorship” doesn’t make sense. Unmarried persons owning property together may own it in two ways, either in joint tenancy, which has a right of survivorship, or in tenancy in common, which does not. If your deed really says “as joint tenants with right of survivorship” then all you need to do to remove your mother’s name from the property is to record your mother’s death certificate attached to an affidavit of death at the County Recorder’s office, together with the appropriate property tax forms.

But if the title to the property is held as “tenants in common”, then your mother’s half of the home belongs to her probate estate and is subject to probate. You’ll have to hire a lawyer, which will cost much more money than merely recording an affidavit of death. There could be other complications as well, if you are not the only child and your mother didn’t make a will leaving you her estate, or at least her home.

Problems like this tend to happen when people do their own legal work. It’s certainly possible to prepare your own deeds, wills, and even trusts, but it’s very easy to make mistakes. It’s not just filling out forms. You need to see a lawyer to review your mother’s deed and determine what you need to do to clear title to the property.

Len & Rosie