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Reverse Mortgage Blog

What Options do the Heirs Have When it Comes to Reverse Mortgages

January 3, 2023

One of the largest misconceptions with reverse mortgages is that the homeowner loses ownership of the home and they cannot pass the home onto their heirs.  That is simply not true, you still retain ownership and you can absolutely still pass the home to your heirs in the future. Moreover, there are no major differences between a traditional mortgage vs a reverse mortgage when passing a home onto the heirs.  As a matter of fact, because a reverse mortgage is a non-recourse mortgage, the reverse mortgage provides additional protections for the homeowner and the heirs that a traditional mortgage typically does not provide.

Since the reverse mortgage does not need to be paid off until the last living borrower permanently leaves the home, the reverse mortgage can remain in place for many, many years.  The date when the reverse mortgage is due and payable is the youngest borrower’s 150th birthday. However, once the homeowner no longer occupies the home as their primary residence, the clock starts ticking for the reverse mortgage to be paid off.  From the time the homeowner permanently leaves the home, the reverse mortgage must be paid off within 6 months.  FHA does allow up to two 90-day extensions in many cases which can provide the family up to a total of 1 year to pay off the reverse mortgage. 

The heirs have several options and each option needs to be considered.  So let’s take a closer look into the different options that the heirs have to payoff the reverse mortgage:

  1. The heirs can sell the home and payoff the reverse mortgage. If the sales price is greater than the reverse mortgage balance, the heirs can sell the home, pay off the reverse mortgage and keep the remaining equity/ proceeds, just like if it there was traditional mortgage. However, if the reverse mortgage balance ends up being greater than the value of the home, the heirs can still sell the home for fair market value.  In this case, the heirs would sell the home for fair market value and the entire reverse mortgage balance would get paid off (even if the amount owed was above the value of the home) and the heirs would have no financial liability or debt.  The reason is because reverse mortgages are non-recourse mortgages and the homeowners, and the heirs do not have any financial liability for the reverse mortgage.  The house is the only recourse.  
  2. The heirs can payoff the reverse mortgage and keep the home. The heirs can payoff the reverse mortgage with cash, inheritance, life insurance or any means that they would like.  Alternatively, they can get a new mortgage to payoff the reverse mortgage and keep the home. If the mortgage balance is greater than the value of the home, the heirs have the ability to “buy the house” at 95% of fair market value and the entire reverse mortgage goes away.  Let’s take an example:  When Mom and Dad pass away, their reverse mortgage balance is $1M and the home is only worth $800K.  The heirs can keep the house by paying $760K (this is 95% of the $800K home value) and the entire $1M reverse mortgage would be paid off in full with no recourse.  In this example, the homeowners would use $200K more equity than actually existed and the heirs would inherit the home for only 95% of the fair market value. In my opinion this could be considered a windfall for both the homeowners and the heirs! 
  3. The last option would be to turn the keys over to the lender and do what is called a deed-in-lieu of foreclosure. In this case, the heirs simply walk away from the home and the heirs have no financial liability for the home or the reverse mortgage balance.  I do not typically recommend this option, but it is certainly an option that is available to consider under certain circumstances.

In all of the above options, the biggest difference or disadvantage is that the heirs must decide if they want to keep the home or sell the home and pay off the reverse mortgage within 12 months (6 months plus two ninety-day extensions) from when the homeowner permanently leaves their home.  With a traditional mortgage, there is no timeframe that the mortgage needs to pay off, as long as the heirs are paying the mortgage and property taxes and insurance, etc.  So again, the reverse mortgage has a 12-month window that the heirs are required to pay off the reverse mortgage.  The flip side is that the heirs are not required to make any monthly mortgage payments during this time but if the homeowners had a traditional mortgage, the heirs would be required to continue to make mortgage payments, or the loan could go into default. In all cases, the heirs will need to ensure they continue to pay the property taxes and home insurance.  

The irony of this concern is that 99% of seniors want to pass their home onto their kids and 99% of adult children do not want their parents’ home.  Therefore, 99% of the time, the kids will inherit their parents’ home and simply sell the home and payoff the mortgage.  With all this being said, it is likely the heirs could inherit less equity, but it is also possible that they could inherit more cash instead when the reverse mortgage is used strategically in an orchestrated strategy during retirement.

Gabe Bodner profile picture
Gabe Bodner
This blog is intended to educate our clients and referral partners in addition to clearing up any misconceptions surrounding reverse mortgages. I aim to provide education on what reverse mortgages are and how they work so more people are aware that they are an incredible retirement planning tool. Reverse Mortgages are a great way to safely access some of the equity in your home to improve cash flow and to protect and preserve your other retirement assets.
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This blog is intended to educate our clients and referral partners in addition to clearing up any misconceptions surrounding reverse mortgages. I aim to provide education on what reverse mortgages are...
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