Myth or Fact – Will My Heirs be Left with Debt?

Reverse Mortgage Myth: Heirs can be left with debt

Reverse Mortgage Fact: False, Reverse Mortgages are non-recourse loans and you are never responsible for a shortfall of home value compared to loan balance.

You don’t need to worry about leaving your heirs with debt from a reverse mortgage, at least not in the way you might fear. With most reverse mortgages, like the FHA-backed HECM (which covers about 90% of the market), there’s a built-in safeguard called the “non-recourse” feature. 

That means your heirs won’t owe a dime out of their own pockets, even if the loan balance grows bigger than the home’s value when it’s time to settle up. 

Quick Example:

When you take a reverse mortgage, making payments is an option. What you don’t pay(the principal, interest, fees), add up each month increasing the loan balance. Say you borrow $100,000, and over 20 years at 5% interest, it balloons to $265,000. You pass away, and your house is worth $300,000. Your heirs sell it, pay off the $265,000, and keep the $35,000 left. 

• • But what if the house is only worth $250,000? 
    • Here’s the key: the lender eats any loss, not your kids. The mortgage insurance (that 2% upfront and 0.5% annual fee you paid) covers it. Your estate and heirs aren’t on the hook beyond the home’s value.

The only “debt” your heirs face is the obligation to settle the loan when you’re gone, usually within six months, extendable to a year. They can sell the house, pay it off with other funds, or walk away (deeding it to the lender). 

If they do nothing and the lender forecloses, it’s still no cost to them—FHA data shows foreclosure happens in about 5-10% of HECM cases, often when heirs don’t act. No one’s chasing them with a bill.

What if the home sells for more than the loan balance?

• • If the home sells for more than the loan balance: The loan is repaid from the sale proceeds, and any remaining equity goes to your heirs. 

What if the home sells for less than the loan balance?

• • If the home sells for less than the loan balance: The lender takes the proceeds from the sale, and the FHA covers the difference. Your heirs will not be responsible for paying the shortfall.

In Summary:

• • You generally don’t have to worry about leaving your heirs with debt from a reverse mortgage.  The non-recourse nature of these loans protects them from personal liability. However, it’s important to understand that the loan balance will reduce the equity in your home, which could mean a smaller inheritance. It’s crucial to discuss these implications with your heirs and consider all your options before deciding if a reverse mortgage is right for you.

Reverse mortgages can be a useful financial tool for eligible seniors looking to supplement income, pay for healthcare, or cover living expenses, but they also come with complexities that should be thoroughly understood before proceeding.

Learn more about eligibility requirements for a reverse mortgage, situations where a reverse mortgage is best used, and common myths around reverse mortgage that we debunk with facts