How Does a Reverse Mortgage Work after the Owner Dies?

"How does a reverse mortgage work?" is an important question to answer if you've taken out a reverse mortgage or helping a family member with estate planning. You may decide that the taking out a mortgage on property that was debt free wasn't a good idea after all, and you may decide to sell the property in lieu of waiting until death. A reverse mortgage can impact how much inheritance you actually leave to your heirs, if any, and it all depends on the market conditions and property values. If you decide to keep your reverse mortgage, here's what you need to know about what will happen when you or the owner dies:

Clock Waits for Last Surviving Spouse

The ball doesn't start to roll on the lender's end until the death of the last surviving spouse. That spouse has a right to live in the property and enjoy it, but he or she is still obligated to pay the loan while living there. The surviving spouse does have the option to sell the house and get rid of the mortgage. Keep this in mind for estate planning purposes, because your spouse may need additional funds, perhaps from life insurance proceedings, to pay for a new home if there is little or no equity in the home with the reverse mortgage. When the last surviving spouse dies, the lender is notified by the executor of the estate or administrator, or by the heirs, and the lender begins its process of getting the loan paid off.

Lender Sends a Repayment Notice

The lender will send a repayment notice to the executor, administrator or heirs stating that the loan is due and must be paid. Most lenders will also mention the options available to satisfy the loan. One option is to sign a deed in lieu of foreclosure, if the loan balance is more than what the property is worth. The other option is to sell the property, pay off the loan balance and keep the difference.

Time Limitations

One of the main concerns underlying the question, "How does a reverse mortgage work?" is whether a family living in the home has to leave immediately. Sometimes an heir resides with the owner prior to death to take care of them, and finding another place to live right away may be burdensome as well as emotional. The good news is that heirs often have up to 1 year to pay the loan, or sign a deed in lieu of foreclosure. They can take their time to make a decision about selling, and if they make that decision, they'll have time to sell it. However, the heirs are not granted a one year time limit from the start. The initial time limitation is 3 months, but they can ask the lenders for 3 month extensions up to 1 year, as long as the heirs can show that they are making reasonable efforts to sell the house.

One final note when considering the question, "How does a reverse mortgage work?" is that a reverse mortgage does have the potential to disinherit heirs. The property may lower and be worth less that what's owed on the loan. Heirs may have little choice but to turn it over to the lender as a result.