If I Get a Reverse Mortgage, Can I Leave My Home to My Heirs?

If you take out a reverse mortgage, you can leave your home to your heirs when you die. But you'll leave less of an asset to them, and they might have trouble keeping the property.

By , Attorney

If you take out a reverse mortgage, you can leave your home to your heirs when you die—but you'll leave less of an asset to them. Your heirs will also need to deal with repaying the reverse mortgage, otherwise, the lender will likely foreclose.

Once you learn more about this kind of loan and the type of issues your heirs might face if they want to keep the property, you might think twice about getting one.

How Do Reverse Mortgages Work?

A "reverse" mortgage is a particular type of loan in which older homeowners convert some of their home's equity into cash. The most popular type of reverse mortgage is the FHA-insured Home Equity Conversion Mortgage (HECM). The insurance protects the lender, not the borrower.

This kind of loan is different from regular "forward" mortgages. In a reverse mortgage, the lender makes payments to the homeowner rather than the homeowner making payments to the lender. The cash is generally distributed in the form of a lump sum (subject to some limitations), monthly amounts, or a line of credit. You can also get a combination of monthly installments and a line of credit.

Because the homeowner receives payments from the lender, the homeowner's equity in the property decreases over time as the loan balance gets larger.

Eligibility Requirements

Generally, to get a HECM reverse mortgage, a borrower must be at least 62 years of age, occupy the property as a principal residence, and have substantial equity in the property or own the home outright. The property must be in good condition and the borrower has to meet with a housing counselor before getting the loan.

Also, the borrower can't be delinquent on any federal debt, like federal income taxes or a federal student loan. And the borrower must have financial resources available to pay ongoing property costs, like home maintenance, property taxes, and homeowners' insurance.

When the Loan Has to Be Repaid

With a HECM, the loan typically has to be repaid when one of the following events occurs:

  • the borrower dies
  • the home is no longer the borrower's principal residence (or the borrower moves out permanently or leaves due to health reasons for 12 consecutive months or longer)
  • the borrower sells the home or transfers the property's title, or
  • the borrower defaults on the loan terms, like by failing to keep up with insurance premiums or property taxes.

What a Borrower's Death Means For Heirs

When a person with a reverse mortgage dies, the heirs can inherit the house. But they won't receive title to the property free and clear because the property is subject to the reverse mortgage.

So, say the homeowner dies after receiving $150,000 of reverse mortgage funds. The heirs inherit the home subject to the $150,000 debt, plus any fees and interest that have accrued and will continue to accrue until the debt is paid off.

Options for Your Heirs

Under the terms of a HECM, those who inherit a home that's subject to a reverse mortgage get four options.

  • Pay back the loan. Generally, with a HECM, the heirs may pay the lesser of the mortgage balance or 95% of the current appraised value of the home. FHA insurance will cover the remaining loan balance.
  • Sell the home and use the proceeds to repay the reverse mortgage. With a HECM, the heirs can sell the property for the full amount of debt owed on the loan or an amount that is at least 95% of the current appraised value of the property.
  • Deed the home to the lender. With this option, the heirs sign the property's title over to the lender and the lender becomes the home's new owner.
  • Do nothing and let the lender foreclose. If the heirs do nothing, the lender will begin a foreclosure and get title to the property that way.

Reverse Mortgage Problems and Responsibilities for Heirs

According to a 2019 article published in USA Today, heirs who want to pay off a reverse mortgage and keep the home often face months of red tape and frustration when dealing with the loan servicer.

Shoddy loan servicing practices can hinder what should be routine paperwork, debt calculations, and communications with borrowers or heirs.

One Person's Experience

As the article notes, the daughter of one reverse-mortgage borrower sent in a form indicating she wanted to purchase the property and was approved for traditional financing. But she still received a notice of default, which is the first step in a California nonjudicial foreclosure.

The servicer also designated the home as vacant, and turned off the water in the name of property preservation, and scheduled a foreclosure sale. This situation isn't uncommon.

You Might Lose the Home to Foreclosure Before You Work Out Another Option

The U.S. Department of Housing and Urban Development (HUD), the regulator of HECMs, has guidelines that say servicers of these loans should inform survivors and heirs of their options and resolve the loan within six months of a death.

So, generally, under the guidelines, heirs should have six months to satisfy the debt. If they're selling the property and it's still on the market after six months, or they're still actively seeking financing, heirs can contact the servicer and request a 90-day extension, subject to approval by HUD. One more 90-day extension can be requested, again with HUD's approval. But the guidelines don't prevent the servicer from pursuing a foreclosure during this time. In fact, HUD's policies require servicers to initiate foreclosure within six months of a default.

While you face delays or roadblocks due to an issue with the property's title, an impending foreclosure, or a lack of information from the servicer, you'll have to pay for the home's upkeep, taxes, and insurance. Interest and fees will continue to accrue on the debt while you try to work out any of the above options.

Also, heirs have noted that servicers often won't negotiate and don't communicate during the workout process, and homes end up being foreclosed in many cases.

      Be Sure to Explore All Options Before Taking Out a Reverse Mortgage

      Reverse mortgages are complicated and usually not the best option for older homeowners seeking access to extra cash. Before taking out a reverse mortgage and tapping into your home equity, you should be sure to explore all available options. For instance, you might qualify for a state or local program to lower your bills or you could consider downsizing to a more affordable home.

      You can learn more about reverse mortgages, as well as other available options for older homeowners, at AARP's website at www.aarp.org/revmort. Even though you'll have to complete a counseling session with a HUD-approved counselor if you want to get a HECM, it's also highly recommended that you consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out this kind of loan.

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