Reverse Mortgage & Still Leave Your Home to an Heir?

How could you take a reverse mortgage AND still leave your home to an heir?

The assumption is that if you do a reverse mortgage, then the equity is going to be consumed or eaten up by the interest and then there would be nothing left for your heirs. Worse, if the reverse mortgage eats up all the equity and then some, your heirs could be left with a debt.

Let me address these two important points:

1) Reverse mortgages are non-recourse loans, this means that in the unlikely event that the reverse mortgage eats up all the equity and then more is owed to the reverse lender than the value of the house, the lender loses. They don't come after you or your heirs—and this is a risk the lender assumes.

For the traditional reverse mortgage, meaning for homes under 1 million dollars, these mortgages are guaranteed by the Federal Housing Administration—the FHA. In the unlikely event the mortgage debt ends up being greater than the value of the house, the FHA pays for the difference. This is why at closing, the borrower pays an FHA premium to protect the lender against this event, and this is why these mortgages are so popular with investors (who buy them).

For homes over $1M, the reverse mortgages are not guaranteed by FHA, however they are still non-recourse. Therefore on these reverse mortgages there is more risk to the lender, and this is why the interest rate on these mortgages is higher—at this writing, about 3% more. 

2) More importantly, how could you take a reverse and STILL leave your home to an heir?

A reverse is a mortgage like any other mortgage, except that it works in reverse. Instead of every payment accumulating equity, as in a regular mortgage, with a reverse mortgage equity is reduced with every payment that you don't make.

What if you had a family member who expressed interest in buying your home after your passing? How could they buy your home if the property is going to be saddled with a reverse mortgage?

The solution is simple: the relative could start making mortgage payments on the reverse (right now). You would need to hire a lawyer to paper this out properly, but if the family member is serious, he/she could make the payments for you! Because remember, the reverse mortgage IS a mortgage. 

If the family member makes the payments and treats the reverse mortgage as a regular mortgage, by the time you pass, the balance could be greatly reduced to almost nothing. 

Moreover, a requirement of the reverse mortgage is that you live at the property as your primary residence. But, if the property is big enough, and the relative decides to pay for the mortgage and you both get along... why not have the relative also move in? In this manner he or she pays for something they are also using, and it becomes a win-win for everyone! 

In this manner, you can qualify for a reverse mortgage, get the money you need now and have the relative earn your home over time.

I wanted to make sure to mention this possibility which I have never seen discussed anywhere. 

Doing this would require proper planning and competent legal advice and contracting, but it would achieve a dual objective: providing funds that are relatively easy to qualify for while potentially creating the opportunity of home ownership for a relative.

I hope you found this information useful, and if you have further questions please let me know.

Disclaimer: This general information is NOT a substitution for the advice of an attorney, accountant, and/or financial planner. Before you decide to pursue a reverse mortgage, you should carefully consider your individual circumstances so you can make a wise decision about the most valuable asset you may own—your home. Factors to consider include whether the proposed reverse mortgage is a recourse or nonrecourse loan, whether the loan would have a fixed or adjustable interest rate, and/or the current and projected market value of your home.