Q: My parents are thinking about taking out a reverse mortgage. They say that they could use the cash from their home equity more than the home equity at this point. Not to be indelicate, but if they get a reverse mortgage, does that mean the bank will automatically foreclose after my parents are gone?
A: Your question is a valid concern for anyone considering a reverse mortgage loan. While the mortgage lender will not automatically foreclose, there are strict owner occupancy requirements for borrowers of reverse mortgages.
In general, at least one of the reverse mortgage borrowers must occupy the home; if all borrowers permanently vacate the home through relocation or death, the reverse mortgage lender can call mortgage due and payable. If this happens, it means that your parents' mortgage must be paid in full within a specified time or their lender could foreclose.
Terms and timetables concerning reverse mortgages can vary, especially if your parents take out a reverse mortgage that is not backed by HUD.
According to HUD, the federal agency that backs most reverse mortgages, the mortgage debt must be satisfied upon the death of all borrowers. This is typically done by selling the home to pay off the mortgage balance, but depending on your parents' circumstances and family wishes, other options may be available. These include refinancing the reverse mortgage or the heirs using their own resources to pay off the mortgage debt.
Any funds remaining after the reverse mortgage is paid off would belong to your parents' estate or heirs according to state law.
Before applying for a HUD-backed reverse mortgage, your parents are required to attend reverse mortgage counseling with an approved counselor. You may wish to attend the sessions with them to get your questions answered and your concerns addressed. Comparing the pros and cons of a reverse mortgage to other alternatives can help your parents find the right mortgage.