Ordinarily, once a homeowner moves, sells the home or dies, the reverse mortgage becomes due and payable. But how is the loan repaid?
Reverse mortgage heirs have several choices when a reverse mortgage becomes due.
They can sell the home, using the proceeds to pay the reverse mortgage lender, and adding any remaining money to the estate.
Sometimes, homeowners take out life insurance to pay off a reverse mortgage when they die. In this case, the executor would use the policy to pay the reverse mortgage balance and the heirs would inherit the home.
If keeping the family home is important to them, and they have the resources, heirs can pay off the reverse mortgage from their own funds. This might be a good solution if the heirs were already sharing the house with the deceased homeowner, and if the reverse mortgage balance does not exceed the property’s value.
Heirs who wish to keep a home that still has some equity can also choose to refinance it, paying off the reverse mortgage and replacing it with a new reverse loan or a traditional forward mortgage.
What if the Reverse Mortgage Balance Exceeds the Home’s Value?
In the case of underwater homes securing reverse mortgages, the heirs may be able to purchase the home without being responsible for the excess debt. As long as the reverse mortgage is a government-backed HECM and not a proprietary or jumbo reverse mortgage, the heirs can purchase the home for 95 percent of its appraised value. The purchase satisfies the reverse mortgage debt entirely, and the heirs take ownership of the home.