Here's what happens to their reverse mortgage after your parents die

As more seniors turn to reverse mortgages, their adult children might well be puzzled or concerned about what will happen to that debt when one or both of their parents eventually dies. At that time, questions about how to pay off the loan will need to be resolved -- and relatively quickly.
Loans are due when borrower dies

Nearly all reverse mortgages today are home equity conversion mortgages, or HECMs, which are insured by the Federal Housing Administration. HECMs are subject to certain rules that might not apply to non-HECMs.

The first thing adult children should know about HECMs is that these reverse mortgages technically become due and payable when the borrower dies.

The word "technically" is important because it's understood that a borrower's heirs can't possibly refinance or sell the home on the day of death to satisfy the debt, explains Beth Paterson, a certified reverse mortgage professional at Reverse Mortgages SIDAC, a division of Greenleaf Financial in St. Paul, Minnesota.
A harsh letter

Instead, what usually happens in practice is that the loan servicer sends out a letter that Paterson says might seem insensitive but is intended to inform the heirs of the rules and ascertain their intentions for the loan and property.

"The servicing companies have had issues with people not notifying them and trying to stay in the home, so that's why it needs to be harsh," Paterson says. "My conversation to the consumer is that communication is vital."
Notice of demise

Servicers use a number of resources to find out that a borrower has died. These include the Social Security death index, proprietary databases and annual occupancy letters that typically are sent to reverse mortgage borrowers.

"If they don't get the letter of occupancy back or property taxes or insurance aren't paid, they start doing the next steps: contacting an alternate contact, searching other records or sending someone out to inspect the property and see if someone is living in the house," Paterson says.
Refi, sell or deed

The borrower's heirs aren't required to sell the home to pay off the reverse mortgage, says Cara Pierce, a housing and reverse mortgage counselor at ClearPoint Credit Counseling Solutions in Fresno, California.

But if heirs want to keep the home, they'll have to pay off the loan.

"If they want to get a loan in their own name and pay off the reverse mortgage, they can," Pierce says. "But if they can't and there are no other assets, like life insurance, other property or a 401(k), that they could use to pay off the loan, they will have to sell the property."

When heirs sell, they typically can choose their own real estate broker. The heirs manage the sale and keep any capital gain after the loan and closing costs have been paid.

The borrower's personal belongings and furnishings can be removed. Fixtures, as defined by state law, can't.

A tenant living in the property might have certain rights and protections under state law.

Read more: http://www.bankrate.com/finance/mortgages/pay-reverse-mortgage-after-parent-dies.aspx