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The Mortgage Motivator: Pressing buttons produces frustration

National Mortgage Professional
Apr 11, 2007

Life estates and seniorsNelson A. Locke, CRMLlife estate, language and construction of life estates A discussion of their application to reverse mortgages A life estate is an estate with a duration measured by the life of a designated person or the survivor of a group of persons. A life estate is an estate smaller than a fee simple. It is less than full ownership, but it is full possession. The owner of a fee simple can create a life estate by using language that clearly shows the intent to create a life estate for a spouse or co-resident, rather than make a full transfer of title via a fee simple conveyance. There are no particular types of words required - just a clear and unambiguous expression of intent. The very same life estate can then be transferred to yet another person, but it will expire upon the death of the person who was the original grantee. Life estates may be created to last for the life of a single transferee, for the lives of two or more transferees, for the life of the transferor, or until the death of the survivor of two or more persons. A life estate is a combination of rights and privileges offset by certain duties, absence of rights and liabilities. The most important right of a possessor of a life estate is the right of possession, which is protected by law. The principal privilege is that of making beneficial use of the land or receiving rents arising from his letting of the land. Except for the right to convey a fee simple, the rights of a possessor of a life estate are nearly identical. However, a possessor of a life estate must not waste the asset; that is to say, he must care for the land and not allow it to be damaged or diminished in value. With modern life estates, the issue is usually the language used in the construction. The general rule is that when a grantor has an estate in fee simple (which is pretty much an infinite right to own and use the land), a life estate gives the grantee the use for the duration of his life. What if the grantor was not the holder of a fee simple, but rather a possessor of a life estate himself? The law would generally hold that the subsequent grantee's life estate would end when the grantor died. You can also use a life estate that is defeasible - one that might revert to the original grantor before the grantee's death. A good example of this would be an estate granted to a church for as long as the church uses the land for church activities, or an estate that reverted upon divorce or abandonment. If the designated event or prohibited act took place, the estate would revert because the language clearly defined the conditions of continuance. If you are evaluating an estate and having problems deciding what type of estate exists, remember this: If there are no conditions on future use or length of ownership, you are probably reviewing a fee simple estate. If the person possessing the estate does not have a right to dispose, you are probably reviewing a life estate. A life estate is less than a fee simple estate. So, how does all this enter into the reverse mortgage picture? When seniors apply for a reverse mortgage, they must meet certain requirements. First, in the case of fee simple, if the property owner is married or the property is co-owned, both individuals must meet the minimum age requirement of 62 or older. Sixty-two is the threshold age for the mortality algorithm that drives the benefit calculation. Second, the collateral residence must be their primary home. There are other requirements, but these are the two main qualifiers. But what do you do in the case of a 70-year-old wife who has limited cash, no insurance, needs skilled home health care and has a spouse who is 64? While they qualify together, his age will reduce their benefits. The benefit calculation will always drive off the younger party. That generally means less money will be available to take care of the older senior who needs the health care. A possible (but not only) solution is to take the younger party off the deed and protect his possessory interests via a life estate. This would cause the benefits to increase, but it would also place the younger senior at risk when the older senior passes. To protect him fully, a will should be considered whereby the younger senior inherits the property and title passes back as a fee simple, allowing him to then apply for his own reverse mortgage and continue living in the home he loves. This is where the lawyers come in. You need to know a good attorney who can help you when you encounter this situation. Don't try to go it alone. This article is intended to be a discussion paper to help mortgage brokers understand why a life estate can be both a solution and problem at the same time. Ultimately, you need to be able to advise your clients so that they can make an informed decision and, if appropriate, take a well calculated risk. With planning, it can work well. If you only do the first part, which is creating the life estate and removing the younger senior from the deed, you may be doing a disservice. Anything worth doing is worth doing completely. Don't leave them hanging; send them to a lawyer you trust who can validate your strategy. Always treat your clients as if they were your parents. A life estate under certain circumstances can help improve their financial position dramatically. But don't forget the second half. Help them build their exit strategy up front. Make sure the possessor of the life estate is protected. Then, when the time comes to revert the deed, he will remember your services and appreciate your professionalism even more. Nelson A. Locke, CRML is a past president of the Florida Association of Mortgage Brokers (FAMB), a founding member of the National Reverse Mortgage Lenders Association, the founder of the Association of Reverse Mortgage Specialists Inc. and CEO of Value Financial Mortgage Services Inc. He hosts the public television program "Ask Mr. Mortgage," discusses reverse mortgages daily on AM radio and designed the FAMB training course "Understanding Reverse Mortgages." He may be reached at (800) 760-5363 or e-mail
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