Reverse mortgages are financial arrangements that make it possible for homeowners to make use of the equity in their homes while they are still alive. Often used to create a source of steady revenue during the retirement years, homeowners continue to occupy the home until they die or must enter some sort of assisted living facility. However, this arrangement does mean that some preparations must be made in advance if the home is to remain in the possession of the estate after the death of the homeowner, and ultimately pass on to an heir.

In order to explore the possible ways to ensure an heir does receive the property used in a reverse mortgage, it is important to understand the nature of the claim of the lender. When the reverse mortgage was created, the lender essentially agreed to provide the homeowner with payments on a loan, with the understanding that the loan would be repaid in one of two ways. First, the loan would be settled in full by allowing the lender to gain full ownership of the property once the homeowner no longer resided there. Second, the heirs would arrange to pay off the reverse mortgage, thus eliminating the claim of the lender on the property.

One approach that can be used is for the heirs to take out a traditional mortgage once the homeowner is deceased or is not longer residing in the home for any reason. Since the terms of the reverse mortgage only allows the lender to claim a balance due on the original loan, the new mortgage must only produce enough to pay off the reverse mortgage in order for the heir to assume control of the property. If the property is now appraised at a higher market value, there is a good chance that the heir can easily secure a new mortgage and settle the reverse mortgage quickly.

However, if the property has declined in value, the heir will have a much harder time securing a new mortgage to pay off the reverse mortgage arrangement. From a practical point of view, it may be in the best interests of the heir to simply allow the lender to lay claim to the property and sell it off in order to recover as much of the investment as possible. While this does not allow the heir to retain control of what may be property with a great deal of sentimental value, it does prevent the heir from incurring a great deal of debt.

Some homeowners do arrange their estates in a manner that will prevent an heir from incurring expense and still be able to take control of the property. This is managed by setting aside resources that either partially or completely pay off the reverse mortgage as part of the estate settlement process.

For example, if the homeowner had invested wisely in stocks or bonds, the arrangements left for the estate could specify that those financial instruments be sold and the proceeds used to retire the reverse mortgage. This would leave the property clear of any sort of claim by any creditors and allow it to pass to the heir completely debt free.

If the intent of the homeowner is to ensure that an heir gets some benefit from the property, but there is no preference for what form that benefit takes, it is possible for the estate to arrange for the sale of the property. In this scenario, the property is sold at current market value, with the proceeds used to pay off the reverse mortgage. If the home is worth more than it was at the time the reverse mortgage was arranged, any funds left after the mortgage is paid in full go to the heir.

For example, if the home was worth $100,000.00 at the time the reverse mortgage was created, but was sold for $150,000.00 after the death of the homeowner, the lender holding the reverse mortgage would receive $100,000.00 to settle the mortgage. The heir to the property would receive the remaining $50,000.00 as an inheritance.

Before entering into a reverse mortgage, it is important to consider what you want to leave behind for your children or other loved ones. When the property used to secure a reverse mortgage has been in the family for many years, there may be compelling reasons to want it to remain with a loved one. If this is the case, homeowners should speak with an estate planner about how to arrange the estate so that the commitment to the lender can be honored and the home can be passed on to the desired heir.