Can you, then? YES!
There aren't any significant advantages or disadvantages between a standard mortgage and a reverse mortgage or refinancing reverse mortgage when passing a home on to the heirs. In other words, homeowners with reverse mortgages can still leave their homes to their heirs while still having a reverse mortgage. The most common misunderstanding concerning reverse mortgages is in fact this one. The greatest distinction—or drawback—is that within 12 months after mom and dad's final departure from their home (6 months plus two ninety-day extensions), the heirs must decide whether they wish to keep the house or sell it and pay off the reverse mortgage. As long as the heirs are covering the mortgage, property taxes, insurance, and other costs, there is no clear deadline for paying off a typical mortgage. Therefore, the heirs are obligated to repay the reverse mortgage within a 12-month deadline… On the other hand, there is no monthly mortgage payment due from the heirs during this period.
The heirs can sell the house, pay off the reverse mortgage loan, and keep the remaining equity or proceeds, exactly like they would if it were a regular mortgage, if the home's worth is more than the reverse mortgage sum. The residence can also be kept by the heirs, who can then use cash or a new mortgage to pay off the remaining reverse mortgage sum.
The heirs would not be held liable for anything, though, if the balance of the reverse mortgage turns out to be higher than the value of the house. The heirs have two options: they can work with a local Realtor to complete a “short sale” or they can hand the keys back to the lender and execute a deed in lieu of foreclosure. This implies that they would sell the house for market value, pay off the whole mortgage sum (including any amounts due beyond the home's value), and leave the heirs with no debt or financial obligation. This is true since reverse mortgages are non-recourse loans, and neither the homeowners nor the heirs are financially responsible for them. Furthermore, the reverse mortgage is completely eliminated if the heirs decide to maintain the house and the mortgage balance exceeds the home's value. In this case, the heirs can essentially purchase the house for 95% of its fair market value. In my opinion, the heirs could potentially consider this a windfall! Imagine that your parents were able to use all of their equity—$1 million—on a house that was only worth $800,000 when they died. The $1 million reverse mortgage would be fully repaid and the heirs may keep the home by paying $760,000.
The irony is that while 99% of elders want to leave their home to their children, 99% of children don't want it. Therefore, in 99% of cases, the children who inherit their parents' home sell it and settle the debt. As a result, it is likely that the heirs would receive less equity, but if the reverse mortgage is managed wisely, it is also possible that they will receive more cash in the future.
0
