Homeowners

Can You Inherit a Home with a Reverse Mortgage? What Heirs Need to Know

One of the biggest myths about reverse mortgages is that they rob adult children of their inheritance. The reality? Heirs absolutely do inherit homes with reverse mortgages.

Whether they want to live in the family home or sell the property to fund their own home purchase, heirs may not be aware of their inheritance options if their parents took out a reverse mortgage.

Reverse mortgages allow older homeowners to tap into the equity they have in their homes in the form of a loan that must be repaid when they move, sell the property, or pass away.

“This is just a loan. It’s just a mortgage,” said Larry Melton, a New American Funding area sales manager based in Portland, Ore. “[A reverse mortgage] is no different than any other financial tool.”

Melton encourages families to have open conversations about reverse mortgages as part of their overall estate planning process and financial strategy. But even if heirs are caught off-guard, a reverse mortgage just changes how the property is handled after the homeowner passes away. It does not eliminate the ability to inherit a home.

Heirs can pay off the balance and keep the property or sell it to pay off the loan and keep any remaining proceeds.

What is a reverse mortgage?

A reverse mortgage is a loan available to homeowners 62 and older that allows them to convert a portion of their home equity into cash. Typically, homeowners need to own at least half of their home outright or not have a mortgage.

The most common type is the federally insured Home Equity Conversion Mortgage (HECM), backed by the Federal Housing Administration (FHA).

How does a reverse mortgage work?

Unlike a traditional mortgage, reverse mortgage borrowers don’t make monthly payments to the lender. Instead, the lender pays the homeowner either as a lump sum, monthly payments, or a line of credit.

Reverse mortgage payments are typically untaxed. The loan balance grows over time as interest and fees are added.

How do you pay back a reverse mortgage?

The loan typically becomes due when the homeowner dies, sells the home, or permanently moves out. Depending on the lender, heirs generally have several months, with possible extensions, to either pay back the loan or sell the home.

Can you inherit a home with a reverse mortgage?

The short answer is yes. But heirs first need to settle the reverse mortgage balance. Depending on what family members want, paths forward include:

Pay off the reverse loan and keep the home

Heirs who want to keep the property can pay off the full loan balance, or 95% of the home’s appraised value, whichever is less.

That 95% rule matters if the housing market has declined and the loan balance exceeds what the home is worth. It can also help ease the burden on heirs.

“It’s a way for families to be able to retain the property for a little bit of a discount, to not be responsible for that shortfall,” Melton said.

To pay off the loan, heirs might use personal savings, refinance into a traditional mortgage, or obtain a new loan in their own name. Once the reverse mortgage is satisfied, the home is theirs to live in, rent out, or hold as an investment.

Heirs can sell homes with reverse mortgages and keep the remaining equity

Heirs can sell the home if they don’t want to keep it or can’t afford to pay off the balance from the reverse mortgage. In that case, the proceeds from the sale first go toward paying off the reverse loan balance. Any remaining equity belongs to the heirs as part of the estate.

If the heirs do nothing, the lender will eventually foreclose on the property to recover the loan balance. This isn’t an ideal situation.

Instead, heirs can also choose to deed the property to the lender, satisfying the loan obligation.

Understanding an inheritance with a reverse mortgage

While a reverse mortgage can cause concern for adult children hoping to inherit a family home, families can still preserve the property.

Melton urges families to have open conversations well in advance of the point at which the loan becomes due, particularly given the prevalence of common misconceptions about reverse mortgages.

“[A reverse mortgage] does amazing things, but it needs to be understood,” said Melton. “It needs to be part of the overall family plan.”

Larry Melton NMLS# 830225