A reverse mortgage is a loan, and a lien is placed against the property. He does not lose the house when he gets a reverse mortgage; he still has full title to it. Since it is a reverse mortgage, he does not have to make monthly mortgage payments, and therefore the lender cannot foreclose on him for non-payment for as long as it is his primary residence. Likewise, since it is an open-ended loan, your grandfather can remain in his home (and the loan is not due) for as long as it is his primary residence; there is no expiration date or deadline. However, because he still has full title, he is required to continue to pay for property taxes and homeowner's insurance.
Once it is no longer his primary residence, either because he passes away or sells it or moves to a nursing home permanently, the loan becomes due and payable. For the heirs / estate to inherit the house, like with any other loan, the reverse mortgage must be paid off first. The loan is not assumable. The heirs can either refinance into another loan in their own name and keep the home or sell the home and keep the difference after the loan is paid off. If the home sells for less than what is owed (there are restrictions - must be arm's length transaction), then the heirs are not personally liable for the difference and the lender takes the loss. The heirs can also choose to walk away and sign a Deed in Lieu of Foreclosure; by signing this, the heirs are giving up title to the lender and making the lender responsible for the sale.
The heirs make the choice. This would be no different than any other loan or lien on the property. The good news is that with a reverse mortgage, the heirs have a minimum of 6 months to refi or sell the house; and typically can get two 3-month extensions, for a total of one year if they are showing a good faith effort to pay off the loan. Another advantage of a reverse mortgage is that the lender cannot go after any other asset your grandfather may have in order to pay off any shortfall, nor are the heirs personally liable.
The only negative is on you because you may not have the resources to pay off the loan or refinance in order to keep the house when he eventually passes away; especially in this current economy. Since it is a negative amortization loan, each month that your grandfather does not make a monthly mortgage payment, the loan balance gets bigger. However, do you have the resources now to help your grandfather pay his bills and remain independent so he does not have to take out a loan or sell his home?
I specialize in reverse mortgages (CA)