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Many Americans look forward to retirement because it’s symbolic of finally being free of most debts, including a mortgage. However, many seniors are finding that their dollars aren’t going as far as they used to, and by the time retirement rolls around some people are finding that they still owe on their home. As a financial planner, you may find that you have to educate some clients on how to handle such a situation.
You’ll need to explain that while it’s a sobering thought, it’s important for your client to think about what will happen to their home–and their family–should they pass before paying it off. Every state has different laws, so do some research into how to hand off the mortgage to one’s heirs in the easiest way possible.
Encourage your client to sit down with their significant other and/or close family members and work out the details regarding their home and who will take it after they’re gone. The heir must be financially sound and willing to take on the home the way it is, which might require some renovations or updates. If the home is older and the client is aware of some issues but can’t afford to update now, encourage them to consult a contractor to find out what needs to be done and what the estimated cost will be. Make sure the client understands that preparing for these changes now will help the person who takes over the mortgage immensely.
Check federal lending laws
In many cases, federal law allows the heir to take over the mortgage at the same interest rate and payment amount that a person has now, because death of the owner creates an exemption wherein lenders cannot demand their payment in full. If the heir doesn’t have the credit to refinance the home but wants to keep it and continue making payments on the mortgage, most lenders will allow it.
Some states have specific laws about quitclaim deeds, which gives the new owner whatever interest in the property that the former owner had, so get an understanding of these options and present them to the client.
It’s absolutely essential that a person writes out a will or living trust and keeps it updated in the event of their untimely death. This will help clear up any confusion about what assets their family members will receive and how they should allocate funds, especially if their estate is going to pay off the mortgage on their home. Advise the client to be very clear about how they want the estate to be distributed, and make out the will. You can provide guidance on this or refer them to a lawyer if they don’t already have one.
With a living trust, the client’s assets will transfer to their relatives without going through probate, a lengthy process carried out through the court system that ensures their directives are carried out according to your wishes.
A reverse mortgage is a lien on the home, which means if there is no co-borrower, the amount of the mortgage will come due after a person’s death. If your client has a reverse mortgage, they’ll need to plan as much as possible for paying it off with the funds from their estate, otherwise their heirs will be responsible for the entire loan after they’re gone.
Selling or Renting The Home
A final option for the heirs is to consider selling the home. While some beneficiaries have a hard time parting with a family residence, at the end of the day, it often becomes more financially sound to sell the home. Especially if the home requires maintenance that the heir or heirs can’t afford to make.
In the event that the family doesn’t wish to sell the home, another alternative is renting out the home. The best approach is to use a property management company to help expedite the rental process, vet applicants, and help with regular maintenance. Renting the property will generate income that can go toward the mortgage and the upkeep of the home until the time comes for a family member to take over the property.
A great way to maximize profits on for sale or rental property is through remodeling and/or updating. If you can afford it, or your estate can afford it, a little bit of a remodel can go a long way toward making your property more attractive to potential buyers or renters.
Thinking about what to do with home in case of death is an overwhelming process, so advise the client that it’s best to sit down with their family to figure out the next steps rather than going through it alone. Encourage them to talk about their desires and be willing to listen to feedback and ideas from their loved ones, because they may have genuine insights on how to go about it. They should remember to plan ahead and think about where their heirs will be in five or ten years; will having a home to take care of be a hardship for them? If so, the client should consider asking someone else to take over the financial aspect of things.