The misconceptions about loan repayment were far and wide before reverse mortgages became regulated and federally insured financial tools.
The lender does not get the home, take title to the home, or own the home or its equity in any way.
A homeowner or heir can sell the home ( that has a reverse mortgage ) at any time with no prepayment penalty. The rule of thumb is to not pay off the loan for at least 18 months after settlement. The HECM is a lien like any other mortgage and when the home is sold the mortgage is paid off.
Assume the borrowers are married and the last borrower dies. There are now multiple options for the heirs. And there are two essential questions to consider first: is there any equity left and do we want to keep the home?
If the heir does not want to keep the home, they may:
Sign a deed-in-lieu of foreclosure. This is done when there is no economic value to selling the home: net sale proceeds are zero. This option allows the heir to relinquish the home to the lender. The lender in turn sells the home for market value and the heir does nothing else.
Or the heir can sell the home and receive the net proceeds. This is precisely where the borrower leaves an inheritance to the heir.
If the heir wants to keep the home:
They can obtain what is called a short payoff for 95% of the current home value. This assumes the debt is greater than the home value. This is a non-recourse feature that protects the heir’s interest in a post-death transfer of the property. ( HUG.GOV-HECM servicing when a HECM becomes due and payable as a result of the mortgagor’s death and the property is conveyed by will or operation of law to the mortgagor’s estate or heirs ( including a surviving spouse who is not obligated on the HECM note) that party ( or parties if multiple heirs) may satisfy the HECM debt by paying the lessor of the mortgage balance or 95% of the current appraised value of the property)
Or the heir can pay off the mortgage balance, typically with a full refinance of the outstanding loan balance.
To learn more about reverse mortgages, contact your local certified Reverse Mortgage Professional (CRMP) for guidance and expertise.