When a person with a reverse mortgage dies, the heirs can inherit the home. But they won't get the title to the property for free because the property is. If you have a home equity conversion mortgage (HECM), your heirs must repay the full balance of the loan or 95% of the home's appraised value, whichever is lower. When the borrower dies, the lender will send an appraiser to determine the market value of the home.
As an heir, you don't have to pay the full balance of the reverse mortgage to keep the property. You can keep the house for 95% of the property's market value, if that amount is lower than the loan balance. If you don't have the money to pay the balance or 95% of the market value, you still have options. You may be able to pay through a bankruptcy plan or by applying for a mortgage in your name to pay the amount owed.
When determining the amount of principal of the loan to offer to applicants, the reverse mortgage lender takes into account (among other things) the average life expectancy of the borrowers, the current interest rate and the expected appreciation of the home value. As the article points out, the daughter of a reverse mortgage borrower submitted a form stating that she wanted to buy the property and was approved for traditional financing. Available to homeowners age 62 and older, reverse mortgages have become a popular way for older people, often with little cash on hand and with a lot of home equity, to convert that equity into cash. Otherwise, what you'll actually inherit is the remaining capital (if any) of the home once it's sold to repay the lender.
Reverse mortgages expire and are paid when the last remaining borrower dies or when the last borrower permanently leaves the home. Most reverse mortgages are home equity conversion mortgages (HECM), backed by the Federal Housing Administration (FHA). Under HECM regulations, if the home you will eventually inherit has a co-borrower, the co-borrower can continue to live in the house and receive payments after the death of one of the borrowers, as long as they meet the terms of the loan. If you take out a reverse mortgage, you can leave your home to your heirs when you die, but it will leave them less assets.
Some state and local governments, along with non-profit organizations, offer single-purpose reverse mortgages, which can only be used for a designated purpose, such as home improvement. To get that full year, they must show evidence that they are organizing financing to keep the house or that they are actively trying to sell it, for example by providing a listing document or a sales contract. A surviving spouse who was not married to the reverse mortgage borrower at the time of the loan may be an heir. For example, borrowers who obtain a reverse mortgage with the payment option or the line of credit option, but then don't immediately withdraw large sums of money or only withdraw a small amount from time to time, won't accrue interest as quickly as those who receive a lump sum on the total amount.
Your heirs will also have to pay the reverse mortgage payment; otherwise, the lender is likely to enforce the foreclosure. Some heirs may lack the funds to pay the loan balance and may have to sell the house to pay off the reverse mortgage loan. If one spouse is deceased, but the surviving spouse is listed as a borrower on the reverse mortgage, they can continue to live in the home and the terms of the loan do not change.