12 Feb 2018

About those Reverse Mortgages and Probate

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Basic Stuff

Reverse mortgages have come to the forefront of many retirees’ minds in the past five years or so. Simply put, a reverse mortgage is a home equity loan. Unlike a conventional loan, the borrowed money can be received in a number of ways: a lump sum, a monthly payment amount, or a home equity line of credit. The mortgage is secured by a deed of trust or mortgage on the property for amount borrowed, as well as the amount necessary to cover the interest payments until the borrower dies. That could mean the borrower owes the reverse mortgage company or bank a significantly larger amount of money than was initially borrowed. The borrower is responsible for property taxes, insurance, any fees, and maintenance upkeep.

The Mortgage Comes Due:

The mortgage can become due if the property is sold or transferred.

The mortgage can become due if no longer used as a principal residence for 12 consecutive months.

The mortgage can become due if you don’t pay it or take care of other obligations like taxes, etc.

When You Die:
So what happens when the borrower passes away? Typically, the lender will make a request shortly after the borrower has passed and give a 30-day notice for the estate to elect one of four options to pay back the reverse mortgage. Those four options include:

  • Pay off – the estate can elect to pay off the reverse mortgage with proceeds from the estate.
  • Refinance – the estate can refinance out of the reverse mortgage and into a conventional loan
  • Sell – the estate can elect to sell the property and the reverse mortgage is paid off with proceeds from the sale.
  • Deed – the estate can issue a deed in lieu of foreclosure to the lender to avoid foreclosure proceedings

If a home with a reverse mortgage goes into probate, the mortgage is still a lien on the property. That means it follows the property as it changes ownership — in short, the heirs to the estate will now be responsible for satisfying the lender. Heirs may choose to sell the property to satisfy the terms of the reverse mortgage. Fortunately, if the amount due on the loan (including interest and fees) is greater than the amount the property will sell for, the heirs are NOT liable for the additional amount owed. If there is any equity left after paying off the mortgage, it belongs to the estate. Note: Heirs cannot sell the property to family member for less than the loan amount.

You may want to meet with me as soon as you know a property with a reverse mortgage is going into probate court. I can help you understand your options to handle a home subject to a reverse mortgage.

The Benefits of a Reverse Mortgage

  • Gives you access to cash to supplement retirement income
  • Gives you tax-free use of the home’s equity which can be used to pay off other debts
  • Does not require a monthly mortgage payment to repay the loan
  • Can allow retirees to push back the date they start receiving social security
  • Receive counseling to understand the features and borrower responsibilities

Disadvantage of a Reverse Mortgage

  • Lenders charge fees to close and maintain reverse mortgage
  • If you go into a nursing home or assisted living and cannot return home, that triggers payment of the reverse mortgage
  • Your estate does incur the interest, fees and full payment on the reverse mortgage once you die
  • You must continue to pay your property taxes, maintenance, insurance, HOA fees, etc., or the lender can foreclose on the property
  • You may leave a smaller inheritance for your heirs since the mortgage must be repaid
  • A transfer of the residence to a trust may be a violation of the terms of the mortgage

The Requirements of a Reverse Mortgage

  • You must be at least 62 or older to qualify
  • The property must be your primary residence and you must be living in it
  • Home must be paid off or have low mortgage balance
  • You must be able to pay future housing costs, such as taxes, insurance, etc.
  • Have no delinquent federal debts
  • Not every property is eligible for a reverse mortgage – manufactured homes and condos can be eligible if they meet HUD requirements, special conditions apply for multifamily properties
  • Meet with a HUD-approved counselor to help you analyze your situation

A Neat Option to leave a legacy:
Often, parents want to leave their home equity as a legacy to their children. While that may be emotional because most kids won’t want your house. If you have equity in the house, but don’t need all of the cash, you might be able to take a portion of the proceeds and purchase a life insurance product with it then spend the money you were holding onto for them. Trust me, they’ll appreciate the cash and so will you. Just a thought.

Before taking the plunge, set up a meeting with me to see how a reverse mortgage might impact your estate and what obligations you will be passing on to your heirs.

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