Have you been thinking about getting a reverse mortgage? As you weigh the pros and cons, you probably have questions about what happens when the borrower dies. Specifically, you may be wondering: does a reverse mortgage go through probate when the homeowner passes away?
It’s a key question to understand. Probate can be a lengthy, expensive process that you want to avoid if possible. And the details get even more complicated when there’s an outstanding reverse mortgage on the property.
Luckily, you don’t have to navigate this solo. In this detailed guide, we’ll walk you through everything you need to know about reverse mortgages and probate. You’ll learn:
- How probate works for a home with a reverse mortgage
- The options for spouses and other heirs after the borrower dies
- Tips for minimizing costs and legal headaches
- Whether you can avoid probate altogether
Let’s start with a quick refresher on reverse mortgages and how they work…
What Is a Reverse Mortgage?
A reverse mortgage allows homeowners aged 62 and up to turn part of their home’s equity into cash without having to make monthly loan payments. Rather than paying the lender each month like a traditional mortgage, the lender pays you.
You can receive funds from a reverse mortgage in a few different ways:
- A lump sum payment
- Monthly payouts over a fixed period or for life
- A flexible credit line
- A combination of these options
The loan balance grows over time as interest and fees get tacked on each month—but the loan doesn’t have to be repaid until you sell the home, move out, or die.
At that point, whatever is owed on the loan must be repaid, usually by selling the home. This includes the original principal, accrued interest, and any fees incurred over the years.
So in a nutshell, a reverse mortgage converts part of your home equity into spendable cash while letting you continue living in the home.
How Does Probate Work?
Before diving into reverse mortgages and probate, let’s walk through what probate is and how it works generally after a homeowner passes away.
What Is Probate?
Probate is the legal process that happens after someone dies in order to transfer their assets like real estate, cars, bank accounts, etc. to the heirs and settle any outstanding debts. It takes place in probate court under the supervision of a judge and can take many months to wrap up.
Here are some of the key steps in probate:
- Validate the will – The court reviews the deceased’s will to confirm it’s legally valid and enforceable.
- Appoint an executor – An executor is chosen to manage the estate and oversee the probate process. This is usually whoever was named as executor in the will.
- Inventory assets – The executor catalogs all the deceased’s assets and estimates their value.
- Pay debts – Any debts like mortgages, loans, taxes, etc. get paid from the estate.
- Distribute remainder to heirs – Once all debts are settled, what’s left goes to the heirs according to the will’s instructions or state law if there’s no will.
Probate With a Mortgage
If the deceased had any outstanding loans secured by assets like a home mortgage, those must get handled before anything can be distributed to the heirs.
The mortgage lender can make a claim on the estate, forcing the sale of the home to pay off the loan balance. Any equity above the mortgage payoff amount would go to the heirs.
The executor is responsible for using estate assets to pay off valid debts before distributing inheritances. Beneficiaries can’t receive anything until all debts are cleared.
How Does Probate Work With a Reverse Mortgage?
Now that you’ve got the gist of probate generally, let’s get specific about how reverse mortgages fit into the mix. Here are the key things to understand:
Loan Balance Comes Due
The first ramification of the borrower dying is that the reverse mortgage balance becomes due and payable immediately. This means whoever inherits the home (the estate or heirs) must repay the loan right away.
At the time of the borrower’s death, the loan balance includes:
- Original principal amount borrowed
- All accrued interest over the years
- Any mortgage insurance, servicing fees, or other costs
And the interest keeps accruing until the loan is repaid!
Options for Spouses
If the borrower was married, the spouse may have options to defer repaying the loan. This applies to spouses who meet these requirements:
- Was married to original borrower when loan originated
- Is listed on loan documents as a non-borrowing spouse
- Still lives in the home as primary residence
In this case, the spouse can remain in the home and take over the reverse mortgage. He or she won’t have to immediately repay the balance.
However, to qualify for deferral, the spouse must establish legal ownership of the home within 90 days and keep paying property taxes, insurance, and homeowner’s fees.
Options for Other Heirs
For anyone other than the spouse inheriting the home, the possibilities are:
- Repay the loan – Heirs can pay off the balance with their own funds to keep the home.
- Sell the property – Heirs can sell the home and use the sale proceeds to repay the lender. Any extra beyond the loan payoff goes to the heirs.
- Deed it to the lender – Heirs can hand over the deed to satisfy the debt instead of repaying it.
- Walk away – Heirs aren’t personally responsible for mortgage deficiencies if they simply walk away and let the lender foreclose.
Foreclosure Is Possible
If the estate doesn’t repay the loan, sell the property, or transfer the deed, the reverse mortgage lender can foreclose to recoup the balance.
The lender takes ownership of the home and sells it. The sale proceeds go towards the mortgage balance, fees, and foreclosure costs.
If the sale price exceeds the amount owed, the heirs receive the surplus equity. If it’s less, the lender takes the loss—heirs aren’t on the hook for any shortage.
Does a Reverse Mortgage Avoid Probate?
Given how probate works for a property with a reverse mortgage loan, you may be wondering if there’s a way to avoid probate altogether after the borrower’s death.
Unfortunately, there usually isn’t a way around probate if you have a reverse mortgage:
- Non-borrowing spouses still must go through the ownership transfer process, which takes place within probate.
- Other heirs need to either repay the loan, sell the home, or deed it over—all of which typically happen through probate.
No matter what, the estate must get the reverse mortgage loan handled and settled through the probate process. The property can’t be transferred until the debt is resolved.
The only exceptions are if the borrower took steps to avoid probate before their death, which we’ll cover next.
Avoiding Probate With Reverse Mortgage
While reverse mortgages alone don’t allow you to bypass probate, there are some estate planning strategies that can help you avoid it:
Transfer on Death Deed
Also called a beneficiary deed, this lets you name someone to inherit the home immediately upon your death. They can record the deed and take ownership without waiting for probate.
But beneficiaries still need to settle the reverse mortgage debt right away. The deed just provides easier home ownership transfer.
A living trust transfers your assets to the trust during your lifetime. You still control everything as the trust creator. But upon your death, the trustee manages and distributes assets per the trust terms, avoiding probate.
A trustee could sell a home to repay the reverse mortgage or take out a new loan to pay it off while keeping the home in the trust.
Either way, the reverse mortgage must still get settled, but the living trust makes the overall estate settlement faster and simpler.
Buy Out Heirs
Another option is to have a trusted heir buy out any siblings’ ownership rights while you’re alive. Then leave the home fully to that heir at death.
They’d inherit the home directly, letting them handle the mortgage privately.
Tips for Heirs During Probate
Dealing with a reverse mortgage in probate can certainly get complicated. Here are some tips for making the best of the situation as an heir:
Once you have the death certificate, notify the reverse mortgage lender immediately and assess your options. This minimizes interest charges as you decide on sale versus payoff.
Understand State Laws
If trying to sell the home, look into your state’s foreclosure timelines. Some let lenders foreclose in just a few months, while others take over a year. A shorter window can motivate buyers and save on growing interest.
Enlist professional help from probate attorneys, real estate agents, and financial advisors to deal with the legal, sales, and money details involved. This ensures you make informed choices.
Research Home Value
Determine the current market value of the property through appraisals and comparable sales. This tells you the likely foreclosure sale price versus the mortgage payoff due.
Mind the Ongoing Costs
Account for expenses like property taxes, insurance, utilities, and maintenance during the probate process. These add up and impact net proceeds.
Verify Non-Borrowing Spouse Status
If you’re a surviving spouse, confirm you qualify to defer the reverse mortgage repayment. Provide the required ownership documentation within 90 days.
Negotiate Sale Price
If selling to repay the loan, see if the buyer will negotiate above the listing price. Every extra bit helps maximize your equity share. Even a few thousand could make a difference.
Leaning on experts and acting quickly are key when a reverse mortgage meets probate. With the right support, you can make sound decisions and reduce headaches.
FAQs about Reverse Mortgages and Probate
Let’s wrap up with answers to some common questions about reverse mortgages and probate:
Does a reverse mortgage always go through probate when the borrower dies?
No, an eligible non-borrowing spouse can defer repayment and remain in the home without going through probate. All other heirs will need to repay the loan balance within probate.
What debts have priority over a reverse mortgage in probate?
Typically funeral and burial costs, probate administration fees, and any last illness expenses take priority. But the reverse mortgage balance is usually the largest debt settled from the estate.
Can heirs be forced to repay a reverse mortgage balance themselves?
No, heirs cannot be held personally responsible for paying off a reverse mortgage. Their only obligation is deciding whether to sell the home, complete a deed in lieu of foreclosure, or walk away if they don’t want to repay the loan.
How long can it take to settle a reverse mortgage in probate?
It varies by state, but the average probate length ranges from 6 months to over 12 months. More complex estates involving disputes or lawsuits can drag out even longer.
Can interest accrual during probate put heirs underwater on the reverse mortgage?
Yes, if probate drags on, the mounting interest and fees can sometimes exceed the property value. This leaves heirs with no equity from a sale. Consulting a probate attorney helps expedite the process before costs snowball.
Take Control of Your Reverse Mortgage and Estate
Planning end-of-life finances is never fun, but understanding how reverse mortgages and probate intersect can give you confidence as you evaluate options.
Arm yourself with knowledge, lean on professionals, and take actions to protect your legacy. This will empower you to make the best decisions for your unique situation, gain peace of mind, and ensure your estate goes to heirs as smoothly as possible.
We hope this guide provided a helpful overview of what happens when a reverse mortgage meets probate! Remember—you’ve got this.