How does a reverse mortgage work after death?

First and foremost, a reverse mortgage is a loan that people take out on their homes in which cash payments are provided until the homeowners die, sell or move out of the home. The homeowner usually makes monthly payments to the lender and after each payment, their equity increases by a certain amount. However, if payment is not made, there is interest added to the balance of the loan, increasing the amount the homeowner would have to pay back. In order to qualify for a reverse mortgage in the United States, the person who borrows the loan must be over the age of 60 and live in the home as their primary residency and have to go through a counseling program to protect the rights of the borrowers. When the borrower dies, sells the house or moves out for more than twelve consecutive months, the loan is due. It can also be due if and when the borrower fails to pay property taxes. There are three types of reverse mortgages. The single purpose reverse mortgage is the least expensive and are offered by some state and government agencies or nonprofit organizations. Federal insured reverse mortgages is also called the Home Equity Conversion Mortgage and is backed by the Department of Housing and Urban Development and proprietary reverse mortgages are private loans that  are backed by private companies. The two latter mortgages are more expensive and should be borrowed only if you stay in your home for a short period of time.However, even though reverse mortgages may seem ideal, it may not always be the case. Reverse mortgages are expensive with high interest rates and many people enter it without fully understanding the conditions associated and therefore take advantage of this, resulting in fraud, or failing to make payments on time. 

First, let’s go over what a reverse mortgage is. A reverse mortgage is designed to allow senior older homeowners who own all or most of their property to withdraw some of the equity from the home for personal use Recipients can choose to receive the money as a lump sum, in monthly installments, or as a line of credit. No monthly payments are necessary. As it is only available to citizens over the age of 62, it is meant to be the last loan a person will receive on their home in their lifetime.

A reverse mortgage must be repaid when the property ceases to be the loan recipient's primary residence. This can happen when the recipient moves, downsizes, has been in the hospital for over a year, or passes away. After a death, the remaining equity in the home goes to the borrower’s heirs, who usually have 3-12 months to decide what to do with the property. Typically, one of four things happens:

1. The recipient's life insurance policy is used to pay off the balance of the reverse mortgage.

2. The recipient’s heirs sell the property and use the proceeds to pay off the balance. If the property sells for more than the loan was worth, the heirs keep the remaining equity. If the house does not sell for enough to repay the balance, the heirs are not responsible for covering the rest of the balance, and the bank absorbs the loss.

3. The recipient's heirs refinance and take out a new mortgage on the house in order to keep the property. (It is possible to have both a reverse mortgage and a regular mortgage on the same property, as long as the regular mortgage has a low loan balance).

4. If the heirs take no action within the allotted period of time, the bank will foreclose on the house to recoup the loan.

Although a useful tool to supplement income in retirement, reverse mortgages are meant to be a last resort, and the recipient should consult the family and heirs in advance about how to mortgage will be paid back in the future. Be sure to look carefully at the terms of a reverse mortgage before taking one out, as some loans can carry high fees and interest rates. 

This is a good question.  Essentially a reverse mortgage is a tool homeowners 62 years of age or older (age requirement for US homeowners) can use to borrow money against the equity in their home ownership.  In essence you are selling your house now, but can live in it until you die, at which point the money you received for the value of the home is due to the lender who lent it to you.  This means that your kids will not inherit your house without having to pay the balance of the loan back first.  Depending on how much the house is worth, this may be a good deal, or it may be a bad deal.  If the value of the home has appreciated significantly, and the interest accrued is less than this increase, the loan balance will be less, and it is in their best interest to buy the home even if they only intend on selling it at current fair market value.
Essentially, your kids will inherit your house, but will inherit the loan you took against it as well, and that loan must be repaid when the person who took it out dies, sells the home, or moves out off the home.  It is general practice that heirs will deed the home over to the mortgage issues if the balance of the loan is worth more than the house (rather than face foreclosure).  Rules differ between the US and Canada, but in the US, your children will not be  held liable for debt that is above 95% of the home value.  In Canada the rules state that a property with a reverse mortgage lien will not accumulate debt higher than the fair market worth of the property.  Additionally, the lender is unable to recover additional losses from the borrowers other assets.  If the borrower lived long enough that the principal and interest together exceed the home's fair market value when the mortgage is due  (in this case death) then the children, or other heirs, will not have to pay more than the house's value at the time for the reverse mortgage loan issued.