Originating: Life Estates: The Changes and the Challenges

Written by Kristen Schnoebelen

Vesting, vesting! 1, 2, 3! When it comes to vesting, there are so many options. Trusts, joint tenancy, community property, tenants in common, life estates. What to choose? Only your borrower and their attorney can make that decision. If they do have their property vested in a life estate, a reverse mortgage is not always a lost cause. There could, however, be potential issues that may ultimately delay or prevent closing.

A life estate is a form of ownership of real property. It can be created by any of the methods of voluntary transfer allowed by law, i.e., by deed, or by testamentary disposition (leaving property at one’s death, most often through a will). Also known as an estate for life, it vests title into one or more persons for the life of “someone.” That someone can be one or more of the grantors, one or more of the grantees, or one or more of some entirely unrelated third party (or parties).

Ginnie Mae recently made some changes in regards to the certification requirements for the Home Equity Conversion Mortgage (HECM) and the Mortgage Backed Securities Program (HMBS). These changes include (1) to verify the promissory note is executed by the holder of the life estate; (2) the security instrument is executed by the holder of the life estate and any future interests (sometimes referred to as the remainderman); (3) the intervening assignments reflect such mortgagors; and (4) the title insurance lists such mortgagors as holding title.

Life estate consists of two parties: the life tenant (the person who owns the property until a specified event occurs) and the remainderman (the person who acquires ownership of the property upon the demise of the person upon whose life the duration of the life estate is measured). The remainderman is also the holder of either a “future estate” or an “estate in reversion.” The borrower’s children are typically named as remaindermen, some of whom could be difficult with regards to signing off, thus creating roadblocks along the way.

Another potential roadblock is a remainderman’s liens against the property. Any liens against a remainderman will attach to the subject property, and must be addressed during the transaction. Examples include a son or daughter’s child support liens or past-due student loans.

A life estate can be created in two ways: it may be granted outright or it may be reserved via deed. A typical deed creating a life estate by grant might say,

“John Jones, a single man, grants to Susie Smith a life estate for the term of her natural life.” In this case, Susie is the life tenant and John is presumed to be the remainderman who owns the estate in reversion and will reacquire title upon the death of Susie. “John Jones, a single man, grants to Susie Smith a life estate for the natural life of Bill Woods.” In this case, Susie is the life tenant and owns the property until Bill Woods passes away. John is presumed to be the remainderman and title will revert to him upon the death of Bill. Bill has no present or future interest in the property; his life is merely the yardstick by which the length of the life estate is determined. “John Jones, a single man, grants to Susie Smith a life estate for the natural life of Bill Woods, with the remainder to Ralph Baker.” In this case Susie, the life tenant, owns the property as long as Bill, the yardstick, is alive. When Bill dies, the property goes to Ralph, the remainderman. Neither John, the grantor, nor Bill, the yardstick, has present or future interest.

Obviously, there are numerous variations of the standard theme. A life estate is essentially stating one person owns the property until a designated person dies, whereupon title is vested into a (usually) predetermined person.

A life estate, an estate in reversion, and a future estate are all interests in real property. Those interests can be bought, sold, gifted, leased, or encumbered. They’re similar to full ownership interest, unless the creating document contains restrictions to the contrary. In most cases the life tenant is responsible for taxes and general upkeep on the property, but this can vary also.

A life estate can be terminated by merger of the “estate for life” and the “estate in reversion.” A deed from the life tenant to the remainderman would merge the interests, and vice versa.

Both the life tenant and the remainderman will need to execute loan documents. The remainderman may execute in counterpart (outside of closing) but your lender may require otherwise. For specific lender requirements, check with the underwriting department or your relationship manager.

Another deed you might see that is similar to a life estate is a Lady Bird Deed. This is another term or a nickname for an enhanced life estate, which is only available in a select few states. The name came from Lady Bird Johnson, because President Johnson supposedly used this type of deed to leave property or land to his wife. An enhanced life estate deed is a variation of a life estate, however this type allows the creator to buy, sell, gift, lease, or encumber, etc., without the consent of the remianderman. This allows the owner to deed the property to their children (or whomever they choose), and still gives the ability to sell or take out a loan on the property, including a reverse mortgage. The enhanced life estate also allows the property to be free of liens against the reminderman’s creditors, which can be another roadblock.

Although most lenders will loan to a property currently held in a life estate, check with your underwriter prior to accepting applications. If you need help closing a reverse mortgage in a life estate, or simply have questions, please contact us at 800.542.4113 or find us on Facebook at facebook.com/PremierReverseClosings.

  • Primefinancial

    Thanks for a very well written explanation.

  • Don Eminizer

    My wife inherited her mother’s house upon the mother’s death. There is a reverse mortgage on it, that we can’t pay off. The house is going to be foreclosed on, and we just want to be rid of it. What are her obligations? She is an only child.

  • Doris Dance

    My father got a reverse mortgage now he’s deceased. I help purchased the home have lived in this home and the home before this one. I was over 62 years of age at the time of the reverse mortgage. Should I have been allowed to live in the home after he passed. I have also received a letter from the lender attorney offering me 500.00 to sign a quit deed. Is that heard of?

  • Brett Kirkpatrick

    The HUD Rule changes on September 19 now require counseling for remaindermen (it was strongly recommended formerly). In addition to the burden of getting document signatures from far flung children (remaindermen typically) or others, now there is also the burden of getting them to counseling. This can be particularly difficult in states that have imposed face-to-face requirements.