DEAR BOB: My mother passed away a few months ago. She willed her home, which has a reverse mortgage, valued at $570,000, entirely to my 45-year-old brother. Yes, my sister and I are not too pleased! We know he needs to refinance in order to stay in the house, as he obviously does not qualify for a senior citizen reverse mortgage. How does the bank learn of the death of a reverse-mortgage borrower? Will our brother be offered a refinanced mortgage? He doesn’t work and has no income at this point so he would have to sell. –Barbara B.
DEAR BARBARA: Reverse-mortgage lenders periodically verify the senior citizen homeowner is still alive and living in the residence, which is the security for the reverse mortgage. After the borrower sells the home, permanently moves out or dies, the reverse mortgage “matures” and becomes due in full.
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When there is a sale of the property, the reverse-mortgage lender will receive a loan payoff demand. If there is a title transfer, since most reverse mortgages provide for property tax payments by the reverse-mortgage lender, the lender knows there was a change of ownership. Or when there is a change of homeowner insurance policy name, that is another clue to the lender of a transfer affecting the reverse mortgage.
The reverse-mortgage lender will not offer refinancing to your brother, especially since he has no income qualifications.
Because he is unable to refinance with a new mortgage to pay off the existing reverse-mortgage balance, he will have to sell the house or lose it when the reverse-mortgage lender declares a default and forecloses. His best alternative is to sell the house and walk away with as much equity as possible.
DON’T CO-SIGN MORTGAGE FOR YOUR PARENTS
DEAR BOB: My parents, in their 60s, plan to buy a house in Arizona. It will be their principal residence. They want me to co-sign on their mortgage so if anything happens to them, I will be the heir. Shouldn’t they instead just create a revocable living trust instead of hurting my chances of buying my own home in a few years? What are my tax implications, debt risks and title rights? My parents both have excellent credit. –Mas H.
DEAR MAS: Please don’t co-sign on your parents’ mortgage if they can qualify for it without your help. As a co-signer, you will greatly reduce or eliminate your borrowing power to obtain a mortgage in the future for your own home or investment property.
For the protection of your parents and you, they should hold title to their Arizona home in their revocable living trust, naming you as the successor trustee and eventual beneficiary. The result will be probate avoidance after they both pass on. You will then receive a new “stepped-up basis” to market value. If your name is already on the title, you won’t receive a fully stepped-up basis. For more details, you and they should consult a real estate attorney.
WHY BOTH SPOUSES SHOULD HOLD TITLE TO THEIR HOME
DEAR BOB: The title to my parents’ home is held in my mother’s name alone. When they bought it about 35 years ago for around $200,000, dad was overseas in the military and my mother earned enough income to qualify for a mortgage on her own. However, my dad is now in rapidly declining health. The house has greatly appreciated in market value and is now worth about $1 million. When I visited my parents recently, my mother said after my dad dies she plans to sell the house because she won’t owe any tax thanks to that “stepped-up basis” you often discuss. Will she get a stepped-up basis although my dad’s name is not on the title? –Scott R.
DEAR SCOTT: No. If your dad’s name is not on the title to the house, presuming your mother survives him, she can’t inherit any interest in the house from him because he doesn’t own any portion of it. Therefore, she can’t receive a stepped-up basis after his death because she won’t inherit his interest in the house.
However, she can easily solve this problem with her quitclaim deed to him of a 50 percent interest before he passes on. Marital transfers are tax-free.
Then, presuming he dies first, she will get at least a 50 percent stepped-up basis in a common-law state and a 100 percent stepped-up basis if they own the house together in a community property state. For full details, she should consult her tax adviser or tax attorney.
The new Robert Bruss special report, “2007 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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