Renting Out Your Home With a Reverse Mortgage? Not So Fast.

By Robert J. Bruss
Saturday, August 19, 2006

Q: DEAR BOB: My 90-year-old mother-in-law, who recently moved into a nursing home, has a reverse mortgage on her home to pay her living costs. My husband is to inherit her house after she dies. We plan to demolish the house and put a new house on the property. What are the financial ramifications of renting the house to tenants until her death? My husband is reluctant, but I don't want to see the house sitting there vacant, when it could bring in $2,000 monthly rent. -- Elaine H.

A: DEAR ELAINE: Because your mother-in-law moved out of her principal residence, her reverse mortgage will become due and fully payable in full after 12 months of her not occupying the house. Reverse mortgage lenders periodically check up on their borrowers to see if they are still alive and are occupying their primary residence, except for absences less than 12 months.

If the house is rented to a tenant, when the reverse mortgage lender discovers the owner no longer lives there, the lender can require the loan balance be paid in full or it will be put into foreclosure. For more details, read the reverse mortgage documents and consult a lawyer.

DEAR BOB: My sister and I inherited two parcels of land. She wants me to buy her out, but I can't afford to have that happen because I live on one of the parcels as my residence. She says she can go to court to get a judge to force me to buy her out. Is this true? -- Josh S.

DEAR JOSH: I am not aware of any state with a statute allowing a judge to force one property co-owner to buy out another co-owner. However, your sister might be thinking of a partition lawsuit. Almost all states have partition statutes where one co-owner can bring a lawsuit to force the sale of jointly owned property. If you want to keep the property after a judge orders a partition sale, then you would have to figure out a way to buy out your sister's half. Consult a lawyer for details.

DEAR BOB: I recently paid off my land. The sellers sent me the original promissory note marked "paid in full" and signed by the sellers along with the original deed of trust and request for full reconveyance, signed and dated by the sellers. What do I do now? Or do I have to do anything? -- Kim B.

DEAR KIM: You must act to clear the recorded deed of trust security instrument from your title. This is done by taking the request for full reconveyance form to the trustee named on that document, paying the fees, and making sure it gets recorded to clear that deed of trust from your title. If your lender had recorded a mortgage, the document to be recorded is called a satisfaction of mortgage.

Don't let this slip by. It is important to take care of this now to clear your title. If you fail to act now, then when you want to sell that land you could have a nightmare on your hands if the trustee or your sellers can't be found.

That happened to me when I bought my house. Fortunately, my sellers were able to locate their private party lender who failed to clear the title when the sellers paid off a second mortgage.

DEAR BOB: My son and I own two rental houses in a college town. A property-management firm handles them for us. We had bad tenants who were evicted after several months of no rent payment and some extensive damage. The property manager filed a lawsuit, but the court date has been postponed because former tenants could not be located. Couldn't they have served the co-signer parents of one of the tenants? -- Ken C.

DEAR KEN: If your tenants were college students, they probably have zero assets. The parents probably have assets and will probably pay up to avoid hurting their credit ratings.

The management company should have served the co-signer parents. Forget about trying to find those ex-tenants, who are probably judgment-proof anyway. Now you know why I recommend managing your own properties, which should be no more than an hour's drive from your home. Consult a lawyer for details.

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