How to Handle a Reverse Mortgage in Probate?
Attorneys from the Wood Law Group explain how to handle a reverse mortgage in probate. Contact us for more information about this and other legal issues.
An Overview of Reverse Mortgages
A residential property left to heirs but subject to a reverse mortgage loan renders the house an encumbered asset in the deceased’s estate. A reverse mortgage can be defined as a home equity loan that enables older homeowners to convert some of their home’s equity into cash. This is often done to provide the homeowner with some form of retirement income in the form of a monthly payment or monthly installment.
Some requirements for the successful creation of reverse mortgages are that the property must be used as the primary residence and should either be owned by the reverse mortgage borrower or have a very low mortgage balance owed. Reverse mortgage borrowers also have to pay their property taxes and insurance and maintain the property.
It is termed a reverse mortgage because the reverse mortgage lender makes payments to the reverse mortgage borrower rather than the homeowner making payments to the lender. Much like a conventional loan, the existing loan is made against the security of the property. The cash is paid out in lump sum, monthly payments, a line of credit, or a combination of these. As payments are made to the borrower, the borrower’s home equity decreases with the growing loan amount.
How Does Probate Affect a Reverse Mortgage?
Dealing with a house subject to a reverse mortgage in probate can be quite challenging. When the last surviving borrower passes away, the loan becomes due and payable. Contrary to popular belief, the home does not automatically revert to the reverse mortgage lenders upon the death of the last borrower. There are four options open to any heir:
- Pay off the loan
- Sell the property and pay off the reverse mortgage
- Deed in lieu of foreclosure
- Do nothing and have the lender foreclose the mortgage
Generally, the heirs are given a 30-day notice to choose one of these four options. The mortgage can become due if no longer used as a principal residence for 12 consecutive months.
If you have been left with a property subject to a reverse mortgage, it may be wise to consult an experienced estate planning attorney before making your decision.
The Four Available Options
Reverse Mortgage works are regulated by the U.S. Department of Housing and Urban Development (HUD).
Option 1: Pay off the Loan
In a buoyant real estate market, the home’s value is often higher than the amount owed on the existing mortgage. This can be assessed by contacting a real estate professional who can advise on the most probable selling price. If the heirs decide to take the home, they can elect to pay off the reverse mortgage loan and get title to the property. The reverse mortgage becomes due and payable to the lender when the borrower passes. Thus, the borrower or their estate at the time of the borrower’s death may end up owing the reverse mortgage company a significantly large amount of money than the borrower initially borrowed or received. The heir could refinance the new loan or settle the remaining loan balance out of pocket from their resources. The heirs would have to choose between paying the loan or 95% of the current appraised value, whichever amount is lower.
Option 2: Sell the Property and Pay off the Reverse Mortgage
If the heirs intend to sell the house, they have to make sure they change the title to their names before selling.
A reverse mortgage is a non-recourse loan. This means that the heir or the eligible non-borrowing spouse is never for any shortfall on the loan. If the property sells for an amount lesser than what is owed on the mortgage, the lender cannot look to the heir to make up the difference. There is usually an insurance policy in place to cover the shortfall. However, the sale must be genuine and made to a non-related third party. Otherwise, heirs could “sell” the home for less than what is owed on the reverse mortgage, and FHA Insurance would have to cover the shortfall, making fraud easily possible.
Option 3: Deed in Lieu of Foreclosure
If the heir does not want the home and the hassle of selling it and settling the reverse mortgage, they can elect to contact the lender and sign a deed in lieu of foreclosure. This process involves the lender accepting a deed instead of having to go through the foreclosure process.
In the right circumstances, executing a deed can be the quickest and most straightforward way to deal with the asset.
Typically the financier will work with the heirs and give them time to sell the house or close the loan before considering a foreclosure. Close communication with the lender is a good idea. Often extensions of time can be granted where it is evident that the heirs are genuinely trying to raise finances or sell the property with interest payments.
Before making any decisions about a home with a reverse mortgage, it is best to consult someone who has an excellent understanding of the probate laws so that you can make the right decision in your unique circumstances.
Option 4: Do Nothing
If the heirs do nothing, the lender will typically foreclose the house, get the title to the home and then do as it pleases. But, contrary to popular belief, lenders do not prefer to foreclose, and their first choice is to get the loan settled fully without the stress and wastage of time that comes along with the foreclosure proceedings.
It may be a great idea to contact experienced probate lawyers for advice in case you are considering taking out a reverse mortgage on your home and wish to leave your home to a beneficiary. It is prudent to do so before making any decisions so that you are well informed at the time of making one.
Insurance and Reverse Mortgages
Typically, full payment of the reverse mortgage outstanding balance should be settled when the borrowers move out of the property or when the borrower dies. A home equity conversion mortgage (HECM) is the most popular type of reverse mortgage and is supported by the Federal Housing Administration (FHA).
Reverse Mortgage FAQs
A few of the most common frequently asked questions about reverse mortgages are covered below:
Are Heirs Responsible for Reverse Mortgage Debt?
The short answer is no; the heirs are not responsible for reverse mortgage debt. As explained above, this kind of loan is a non-recourse debt, meaning that the lender cannot look to the heirs to repay the debt. The heirs do not have a contract with the lender. However, if the heirs decide to keep the house, they can choose whether to repay the loan or pay 95% of the property’s current value to take ownership. This is not an obligation and always remains their choice.
Can Heirs Walk Away From Reverse Mortgage?
Yes, they can. The heirs have no liability under the reverse mortgage contract. Hence, there can be no adverse effect on their credit rating either. However, it is prudent not to cancel insurance policies or let the property run down, as this could attract liability.
Although walking away might be the easiest option, it is recommended that you consult a probate attorney in a professional law firm in Las Vegas, NV. You may be pleasantly surprised and even net some additional value from the deceased estate. Contact our offices for a professional opinion today.