The short answer in two words – Nothing Changes.
Before I get into more details about this specific question, I want to briefly explain what a reverse mortgage is and how it works.
The vast majority of reverse mortgages originated are insured by the Federal Housing Administration (FHA) and are called Home Equity Conversion Mortgages
(HECM). HECM’s allow homeowners, age 62 and above, to convert a portion of the value of the home into tax free* money without having to sell the home,
give up title or obligate them to a monthly mortgage payment.
Reverse mortgages are for primary residences only. The homeowner must live in the home.
The lender does not take title to the home, they simply have a lien against it, just like any other mortgage. Since the property stays in the homeowner’s
name, it is still their obligation to keep current on their homeowner’s insurance and property taxes, as well as maintaining the home.
The homeowner is not required to make a mortgage payment, but they are still charged interest and mortgage insurance on the loan balance. These charges
are added to the loan balance, so it increases over time. As the balance increases, the amount of equity can decrease, depending upon the rate of appreciation
and the rate of interest charged on the loan balance.
In theory, over time, the loan balance could exceed the value of the home. In this scenario, there is no equity left in the home. This brings us back to
the original question: What happens with the reverse mortgage when there is no equity left?
As long as the homeowner is living in the home, keeping up on the property taxes and homeowners insurance, and maintaining the home, nothing changes. They
can continue to stay in the home and not have to make any payments. If the homeowner is receiving a monthly payment from the reverse mortgage on a
tenure payment plan, (payments for as long as the homeowner lives in the home), the payments will continue. If there is money in a line of credit,
these funds will still be available, even if there is no equity left in the home. The loan will not come due until the last homeowner permanently leaves
All HECM reverse mortgage loans are 100% non-recourse. This means that the lender can never collect more than the value of the home from the homeowners,
the heirs or the estate.
If the value of the home is less than the loan balance when the loan comes due, the heirs can simply sign the home over to the lender. The lender will
sell the home for whatever they can and any loss they have will be paid by mortgage insurance. Since the lender is not losing money, they are not going
to come after the homeowners, the heirs or the estate.
However, if the heirs want to keep the home, even if more is owed on the loan than the home is worth, they only have to pay 95% of the actual value – not
the balance of the loan. For example, if the home is worth $200,000 but the loan balance is $250,000, and the heirs want to keep the home, they can
get a loan, or use any other source of funds, and pay the lender 95% of the $200,000 value ($190,000). The lender will file a claim with the mortgage
insurance for the $60,000 difference and the heirs keep the home.
*Consult your tax advisor