When the last remaining borrower dies, the reverse mortgage becomes due, right? Actually, it’s slightly more complicated.

Since most lenders will periodically check on the status of the borrower(s), they will probably learn of the death shortly after it happens. At this point, a letter will me mailed to the primary beneficiary/heir (designated by the borrower and confirmed in the will) apprising one of the situation.

Specifically, you have a few options:

1) Repay the loan in full and keep the property.
2) Sell the property and use the proceeds to repay the loan.
3) Deed the property back to the lender/investor.
4) Abandon the property.

Those who choose to sell the property should be aware that they must receive at least 95% of the appraised value or the full value of the outstanding loan. That rules out the possibility of selling the property to a friend/relative for less than the value of the loan (which is barred by HUD anyway) and simply pass along the loss to the FHA, which presumably insured the reverse mortgage.

If you intend to repay the loan directly and/or sell the property, you should be aware that you technically have 12 months to do so. Unless the property is deeded back to the lender or it has been foreclosed upon, the property officially belongs to the heirs, who retain the right to continue living in the property. As long as they are making a reasonable effort to sell the property or obtain alternative financing to repay the reverse mortgage, the lender will likely grant them a maximum of 4 extensions of three months apiece. During this time, taxes/insurance premiums must continue to be paid, and the loan will continue to accrue interest. If after 12 months no progress has been made or if the heirs violate the terms of the contract in some other way, you can expect the lender to initiate foreclosure proceedings.

Regardless of what happens, you should be aware that you are entitled to any leftover equity in the property if the sale price is greater than the loan balance. On the flip side, a reverse mortgage is a non-recourse loan (and insured by the FHA), which means if it is underwater, the heirs are not liable. If worse comes to worst, you can simply abandon the property and walk away.