Does a Reverse Mortgage Go Through Probate?

A large proportion of homeowners approach retirement age. This is when obtaining reverse mortgages serves as the most effective financial means. These specialized loans empower homeowners who are 62 or older to convert their home equity into cash. When a borrower passes away, the big question arises: Does a reverse mortgage go through a probate? Most heirs and estate planners often have the same question in their minds.

If you take out a reverse mortgage, it will provide additional retirement income without the need to make monthly mortgage payments. This detailed blog post is where you will discover what a reverse mortgage process is, how it interacts with probate, and much more that’s yet to come. 

KEY TAKEAWAYS

A reverse mortgage lets homeowners aged 62+ convert home equity into cash without monthly payments, with repayment due when they pass away, sell the home, or move out permanently.

The reverse mortgage itself doesn’t go through probate, but the property securing the loan does, requiring heirs to address the loan balance as part of the estate settlement.

Heirs are not personally responsible for the loan and can either pay it off, sell the home, or transfer it to the lender through a deed in lieu of foreclosure.

Seeking guidance from a probate attorney or financial advisor can help homeowners and heirs navigate the legal process and make informed financial decisions.

What is a Reverse Mortgage?

A reverse mortgage is a type of loan that most homeowners aged 62 or older take out so they can convert a portion of their home equity into cash. The best thing is that borrowers don’t need to make monthly payments.

The loan balance and interest on it are directly proportional to each other. The homeowner can keep living in their primary residence. This type of loan becomes due in three situations: when a homeowner; 

pass away,

sell the property, or 

permanently move out.

This loan is specifically designed to offer homeowners extra retirement income. It’s often used to meet their living expenses and health care expenses. When a reverse mortgage is obtained, they can borrow money without any worries about the monthly payments. 

This can benefit especially those whose retirement living is based on a fixed income. However, it’s necessary to know and comprehend how this loan can affect the borrower’s heirs. What’s more, be aware of the process involved when the borrower dies. 

How Reverse Mortgages Work? 

Unlike traditional mortgages, the reverse mortgage works more straightforwardly.  Here’s a deeper look into the mechanics of reverse mortgages:

First, homeowners must meet certain criteria to qualify for a reverse mortgage, including age, home ownership status, and financial assessment. Applicants must demonstrate financial stability to ensure they can cover ongoing home-related expenses like taxes, insurance, and maintenance. 

The amount that a homeowner can borrow through a reverse mortgage depends on several factors – such as the homeowner’s age, the current interest rates, and the home’s appraised value. Compared to younger homeowners, older ones can obtain a larger portion of home equity.

The most prevalent type of reverse mortgage is the Home Equity Mortgage (HECM). Choose it as it’s federally insured and offers additional consumer protections. Also, other proprietary reverse mortgages, like private loans, come with government-mandated insurance and can provide larger sums for highly-priced homes.

Homeowners must know how to receive their funds. There are numerous options, such as lump sum payments, monthly installments, and credit lines, as needed. This level of flexibility empowers homeowners to customize their reverse mortgages according to their financial needs.

Repayment of a reverse mortgage isn't required until the homeowner sells the home, moves out, or passes away. That’s where the loan balance, consisting of the amount borrowed plus accruing interest and fees, must be fully paid. Suppose you sell out your home. In that case, any excess equity after repaying the loan goes to the homeowner or their heirs.

Homeowners must take into account the implications of a reverse mortgage on their heirs. The home will likely need to be sold to settle the loan upon the homeowner’s passing or if they move into long-term care, which may influence estate planning decisions.

Does a Reverse Mortgage Go Through Probate?

The plain answer is no. However, if your home is securing the loan, consider it the estate’s part. Therefore, you will be subject to probate proceedings. 

The reverse mortgage lender is supposed to receive the remaining loan balance when you pass away. In this scenario, your heirs will have to address the mortgage debt during probate to settle the estate. 

For them, it’s essential to make critical decisions about managing the property and the loan balance. They may need to pay off the loan, sell the property, or pursue other crucial strategies, such as a deed in lieu of foreclosure. 

Are Heirs Responsible for Reverse Mortgage Debt?

The most common question about reverse mortgages is whether heirs are personally responsible for the reverse mortgage debt after the borrower passes. The good news is that heirs are not personally responsible for the debt to be paid. The mortgage lenders can just claim the proceeds from selling the property. However, they cannot demand additional payment from the heirs. 

Heirs can address the loan balance in several ways, including selling the home or paying it off. But, they are not entitled to pay the loan by selling their own assets or using income. 

If the loan balance exceeds the appraised value of the home, mortgage insurance will help you cover the difference. This will ensure that the lender is paid fully. 

Options for Heirs

Does your reverse mortgage become due? If that’s the case, heirs can leverage several options to resolve the loan balance and settle the estate. Uncertain about the options available and how they can help you out? Let’s examine the three options. 

1. Paying Off the Loan

As the heir, if you want to retain ownership of the property, consider paying off the loan. Consider diverse aspects, such as; 

a. refinancing the loan into a standard mortgage, 
b. borrowing money from another source, or 
c. utilizing other assets to cover the loan balance. 

Heirs looking to keep the home should choose this option. This will help them retain ownership and prevent the overall foreclosure process. 

2. Selling the Property

Another excellent option for heirs is to sell the property to pay off the reverse mortgage. If the home’s value exceeds the loan balance, the remaining proceeds can be divided among the heirs. 

On another note, suppose the loan amount overgoes the appraised value of the property. In that case, the sale can still cover at least 95% of the appraised value. Therefore, the mortgage insurance will forgive the remaining balance. 

3. Deed in Lieu of Foreclosure

Opting for a deed in lieu of foreclosure will benefit the heirs if they don’t want to keep the property. This involves transferring ownership to the lender in response to the cancellation of the remaining debt. 

Utilizing this option sometimes matters most when the property is worth less than the loan balance. Or when heirs don’t want to deal with the burden of the estate. Thus, it’s essential to make up your mind before embarking on the journey of paying a reverse mortgage loan. 

Timeline for Reverse Mortgage Foreclosure

The moment when a reverse mortgage becomes due and the debt remains unpaid, the foreclosure process needs to be started. The reverse mortgage lenders usually send notifications to the heirs and begin the foreclosure process. 

However, this process takes more time than traditional mortgages. This is when heirs gain enough time to explore options so they can resolve the reverse mortgage debt.

Heirs need to communicate with the lender as soon as they can. They must gain an understanding of options and prospective negotiating timelines for resolving the loan balance. Being an heir, if you need more time, you can collaborate with the lender to prevent immediate foreclosure proceedings. 

Wrapping It Up

A reverse mortgage is a powerful financial ally for most retirees. However, there are some unique considerations for heirs and estate planning. The reverse mortgage itself doesn’t go through probate, but securing the loan balance does. 

This is where heirs must address the loan balance to settle the estate. Whether you’re a homeowner with a reverse mortgage or an heir to someone who has one, the best move is to contact an expert probate attorney, financial advisor, or estate planner. 

By strengthening an attorney-client relationship, you can navigate all the complexities of the legal process. You’ll also feel more empowered to avoid potential disputes and make informed financial decisions to secure your family’s financial future.  

FAQs

1. What is the Duration You and Your Partner Intend to Stay in the House?

Reverse mortgages – the most considerable several financial products – come with costs linked with them. Some of them must be paid up-front when you take out the reverse mortgage. 

Suppose you and your spouse have made a collaborative decision not to stay in your home for more than several years. Consider the costs carefully that your reverse mortgage counselor has to offer. Also, look at whether there may be other cost-effective strategies to take advantage of. 

2.  In what manner will the repayment of your reverse mortgage loan occur?

Be mindful that a reverse mortgage is a non-resource loan. Thus, the borrower or their estate will never be entitled to pay the lender more than the loan balance. Even if the current value of the home is less, they will not be obliged to pay it off. 

In case a reverse mortgage is called for repayment. The borrower or their estate needs to repay the lesser amount between the loan balances and 95% of the home's current appraised value.

3. What Happens If You Inherit a House with a Reverse Mortgage? 

An heir should communicate with the lender. If you're inheriting a property with a loan, confirm with the owner about being named as a successor beneficiary. 

Decide your plans for the property, as you can't sell or refinance until you own it, which might involve probate. You'll need to pay off the reverse mortgage with your funds or by selling. If the loan exceeds the property's value, you can settle by paying 95% of its market value. 

If you decide not to keep the home, contact the lender to return it without debt. You'll need the title. Otherwise, foreclosure may occur, though it won't affect your credit.

4. Is it possible for Heirs to Walk Away from Reverse Mortgage? 

Obviously Yes! The heirs are non-liable under the reverse mortgage agreement. That’s why there can be no negative influence on their credit ratings. However, it doesn’t mean that you cancel insurance policies. Take advantage of these policies and let the property run down. As a result, this could contribute to liability. 

5. Even after Choosing the Option, Could Probate Still Take place?

The answer is simple: no. This relies on the borrower’s other belongings and how they planned or managed for the house. Sometimes, it’s simpler. But sometimes, it needs assistance from a specialized resource, like a probate attorney.

Do you have any queries regarding reverse mortgages? Contact Equity Access Group today to get your queries answered and start with the best retirement loan programs.