Anyone who is planning to leave property and assets to loved ones likely knows that probate is part of the process. Still, they might not realize how involved the probate system can truly be. Depending on the complexity of your estate, the court may order that it go through informal, formal, or supervised probate. Moreover, certain types of properties, including homes with reverse mortgages cause particular challenges during probate. Keep reading to learn what a reverse mortgage is and find out how it could affect your estate planning choices.
What Is a Reverse Mortgage?
Many seniors opt to take out a reverse mortgage as a way of obtaining some much-needed cash in their golden years. Unlike second mortgages,which may lead to foreclosure and other negative outcomes, a reverse mortgage refers to a loan taken out against the value of a house that isn’t due back until the seller sells the home, moves out, or passes away. Additionally, individuals can default on a reverse mortgage by neglecting to pay property taxes or insurance.
In some cases, individuals with a reverse mortgage may die, leaving a surviving spouse. According to federal law, a lender can’t foreclose on the non-borrowing spouse under these circumstances. However, the loan must still be paid in full if the spouse sells the house or moves on.
What Is Probate?
Just because most people are familiar with the term probate doesn’t mean they know what it means. A type of court procedure, probate is the means by which an estate is administered. Along with taking a full inventory of the decedent’s possessions during the probate process, the court ensures that taxes and debts are paid in full and that money and assets are distributed to heirs. If the decedent named an executor in their will, that person will be charged with filing the probate and fulfilling all the requirements.
Do Reverse Mortgages Go Through Probate?
So, how does a reverse mortgage affect the probate process? When a home with a reverse mortgage goes through probate, the mortgage is treated like an encumbrance. In other words, the mortgage stays with the property until it’s been satisfied. Once the debt has been paid in full, all the equity belongs to the beneficiaries or heirs as dictated in the decedent’s will. The amount of equity in a house depends in large part on how much the borrower has taken out over the years and how long they held the reverse mortgage.
Are Heirs Responsible for the Reverse Mortgage?
It’s worth noting that heirs can opt to sell a property to satisfy the loan terms. In other words, heirs do not have to take on the loan balance if they would prefer not to. Moreover, if the amount due plus interest and fees exceeds the value of the property, the heirs are not liable for the additional debt. Instead, the Federal Housing Administration pays for this extra cost. Any equity remaining after the mortgage has been paid in full belongs to the estate and the heirs.
Contact JacksonWhite for Help With the Probate Process
Dealing with estate planning and probate can be complicated. With that in mind, many individuals opt to hire an attorney to support them through this process. Along with helping individuals create wills and trusts, our knowledgeable attorneys can guide heirs and beneficiaries through probate.
Call our Probate team at (480)467-4365 to discuss your case today.