​Navigating the Realities of Reverse Mortgages in Probate: Clearing Misconceptions

A reverse mortgage serves as a financial avenue for elderly homeowners to tap into the equity of their homes without the obligation of making regular mortgage payments. This arrangement involves the lender providing funds to the homeowner in lump sum or periodic payments, with no requirement for repayment until certain events occur, such as the homeowner's passing or the sale of the home.

The lender assumes the risk that the funds advanced to the borrower can be recovered through the sale of the home or foreclosure following the borrower's passing. In cases where the proceeds from a foreclosure sale fall short of covering the loan balance, the lender faces a financial loss.
Upon the death of the borrower, the loan balance becomes due. Federal law stipulates that the borrower's eligible, non-borrowing spouse, the borrower's estate, or the borrower's heirs must address this obligation. Options include repaying the outstanding balance with interest, selling the home, providing the lender with a deed in lieu of foreclosure, or rectifying any conditions leading to the due balance.

This article aims to debunk common misconceptions surrounding reverse mortgages, particularly in the context of probate.

The Top Myths of Reverse Mortgages and Probate

Myth: The borrower's spouse will bear the burden of repaying the loan balance.
Reality: A borrower's spouse can defer repayment indefinitely if specific qualifications are met. Federal law mandates that the individual seeking deferment must have been the borrower's spouse at the time of loan closing, named as an eligible non-borrowing spouse in the mortgage documents, and continuously used the home as their principal residence. After the borrower's passing, the surviving spouse must establish legal ownership of the home within 90 days and fulfill other obligations outlined in the loan documents.

Myth: The Borrower's heirs will inevitably be responsible for repaying the loan balance.
Reality: The lender's recourse is primarily limited to the property itself, usually recoverable through a property sale. The borrower's heirs are only responsible for repaying the loan if they intend to retain ownership of the property. Apart from repaying the balance in full, the heirs can sell the home or provide a deed in lieu of foreclosure as alternatives. In cases of foreclosure, any surplus may even be entitled to the borrower's heirs, depending on the sale proceeds.

Myth: Taking out a reverse mortgage means relinquishing ownership of the home.
Reality: The home still passes to the borrower's estate or heirs upon the borrower's passing. Upon the loan balance becoming due, the heirs can choose to repay the balance and retain ownership of the property. Additionally, the lender cannot foreclose on a home occupied by an eligible non-borrowing spouse who has deferred repayment. Reverse mortgages insured by the Department of Housing and Urban Development have provisions preventing the lender from obtaining a deficiency judgment.

Myth: Reverse mortgage lenders are untrustworthy.
Reality: Safeguards are in place for reverse mortgages insured by the Department of Housing and Urban Development. Federal law mandates transparent transactions, including financial assessments of potential borrowers and counseling sessions with approved counselors explaining their rights and obligations under the reverse mortgage agreement. These measures ensure borrowers are well-informed and lenders comply with federal regulations.