Reverse Mortgages and Probate: Understanding the Legal Process

Reverse Mortgage & Probate: What Happens Legally?

When considering reverse mortgages and probate, many seniors are unsure about how the process works after they pass away. A common question is whether a reverse mortgage goes through probate — the legal process of distributing a person’s estate after death.

If you’re wondering how your reverse mortgage might affect your estate and heirs, this guide is for you. You may also want to review the key reverse mortgage pros and cons to better understand how this option fits into your overall retirement plan.

In this detailed guide, we’ll break down the legal implications of reverse mortgages in relation to probate. We’ll address common concerns such as whether the loan balance goes through probate, how heirs are impacted, and what steps are needed to manage the reverse mortgage after death.

By the end of this post, you’ll have a clear understanding of how reverse mortgages interact with probate—and how to plan ahead.

What Is a Reverse Mortgage?

Before diving into the specifics of how reverse mortgages relate to probate, let’s quickly review what a reverse mortgage is. Learn more about how reverse mortgages work to understand the basics before moving forward.

A reverse mortgage is a loan that allows homeowners, typically aged 62 and older, to convert part of their home’s equity into cash or a line of credit. Unlike traditional mortgages, there are no monthly payments to make. Instead, the loan balance grows over time and is repaid when the homeowner sells the home, moves out,
or passes away. See what you could qualify for with a reverse mortgage.

The Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage. It is insured by the government and regulated by the Federal Housing Administration (FHA). There are also jumbo reverse mortgages for those with high-value properties that exceed FHA limits.

Reverse mortgages can be a useful tool for seniors who need additional income in retirement or want to access their home equity without selling their home. However, it’s important to understand the legal process that will follow once the homeowner passes away, and the role probate plays in that process.

Does a Reverse Mortgage Go Through Probate?

In most cases, a reverse mortgage does not go through probate. Probate is the legal process through which the court validates a will, settles debts, and distributes the remaining assets to heirs after someone passes away. With a reverse mortgage, the situation is a little different from other types of loans.

Reverse mortgages are secured loans, meaning that the home itself is used as collateral.
When the homeowner passes away, the loan must be repaid. However, since it is a secured loan, the property itself is the asset that satisfies the debt.

Here’s why a reverse mortgage typically doesn’t go through probate:

1. The Reverse Mortgage Is a Loan, not a Debt to the Estate
   A reverse mortgage is not a traditional debt like credit card debt or personal loans. Instead, it is a loan that is secured by the home. When the homeowner passes away, the reverse mortgage lender will typically start the process of recovering the loan amount by selling the home. The proceeds from the sale of the home go toward paying off the reverse mortgage loan balance, and any remaining funds, can be passed to the heirs. In essence, the home serves as collateral for the loan. This means that when the homeowner passes, the reverse mortgage lender will look to the home to satisfy the loan balance, not the decedent’s estate. Therefore, the reverse mortgage doesn’t typically go through the probate process.
2. The Lender Can Reclaim the Home
   If the homeowner passes away, the reverse mortgage lender will typically begin the process of reclaiming the loan by selling the home. This is done outside of probate, as the sale of the property is a direct way to settle the debt. However, the sale of the home might be included in the probate proceedings if the proceeds are used to pay off any additional debts or be distributed among the heirs.

Does the Home Need to Go Through Probate?

Although reverse mortgages do not typically go through probate, the home itself might still be part of the probate process, especially if there are other assets in the estate that need to be distributed. The estate will handle the distribution of any remaining assets after the reverse mortgage is repaid. This includes any other property or funds that the deceased homeowner owned. The probate court will typically oversee the sale of the home and
ensure that the reverse mortgage loan is paid off before any remaining equity is passed to the heirs.

How Heirs Can Avoid Delays in the Process?
If heirs are named in the will and are willing to sell or pay off the reverse mortgage, the probate process can be straightforward. However, if there are disputes among heirs, delays can occur. To avoid any confusion or delays, it is essential for homeowners with reverse mortgages to discuss their estate plans with a trusted advisor and make their wishes clear.

How Does the Reverse Mortgage Affect Heirs?

While a reverse mortgage typically does not go through probate, it will affect the heirs of the
deceased homeowner in the following ways:

1. The Home Will Be Sold to Repay the Loan Upon the Death of the Homeowner, the reverse mortgage lender will typically begin the process of selling the home. The sale of the home is used to pay off the reverse mortgage loan balance. If there is any remaining equity in the home after the loan is paid, that equity will be passed to the heirs. However, if the home’s sale price is lower than the reverse mortgage balance, the lender cannot pursue the heirs for the difference, because reverse mortgages are non-recourse loans.
2. Heirs Can Choose to Keep or Sell the Home If the heirs wish to keep the home, they have several options like paying off the reverse mortgage, if the home is worth more than the reverse mortgage loan, the heirs can pay off the loan balance and retain the property. If the heirs qualify, they can refinance the reverse mortgage with a traditional mortgage or other financing options. If the heirs don’t want the home, they can sell it and use the proceeds to pay off the loan. Any remaining profits from the sale will be distributed to the heirs.

What to Do When a Reverse Mortgage Holder Dies

After a homeowner passes away, heirs should follow these steps:

1. Notify the reverse mortgage lender: The lender must be informed of the homeowner’s death, and the loan balance will begin to accrue interest.
2. Get an appraisal: The lender will schedule an appraisal to determine the home’s current market value.
3. Sell or refinance the home: The heirs must decide whether they want to keep the home or sell it. If they sell the home, the reverse mortgage loan balance will be paid off from the proceeds.
4. Distribute any remaining equity: If the home is sold for more than the reverse mortgage balance, the excess funds will be distributed to the heirs.

Get more details from the Consumer Protection Financial Bureau.

The Role of the Reverse Mortgage Line of Credit in Probate

A reverse mortgage line of credit functions similarly to a standard reverse mortgage, with one key difference: it allows homeowners to borrow funds as needed rather than receiving a lump sum or monthly payments. Explore how a reverse mortgage line of credit works to understand its advantages.

However, just like other reverse mortgages, the line of credit must be repaid when the homeowner passes away.

If heirs don’t wish to keep the home, they can sell it to pay off the balance. If the home’s value exceeds the loan balance, the remaining equity can be passed to the heirs. If the home’s value is lower, the lender typically forgives the difference, and the heirs are not responsible for paying the remaining debt.

Things to Remember

• Reverse mortgages typically do not go through probate, as the loan is secured by the home.
• The loan is repaid through the sale of the home when the homeowner passes away.
• Heirs can either sell the home, refinance, or pay off the reverse mortgage to keep the property.
• Reverse mortgages are non-recourse loans, meaning heirs are not personally liable for the loan balance beyond the home’s value.
• The reverse mortgage line of credit works the same way but provides flexibility in how funds are used before the homeowner’s death.

Talk to a Reverse Mortgage Specialist

At South River Mortgage, we understand that reverse mortgages can raise many questions, especially when it comes to probate and estate planning. Our team is here to guide you through the process and help you understand how reverse mortgages work in your unique situation. Have a question about probate and reverse mortgages? Get answers from our Reverse Mortgage Experts at (844) 230-6679.