Reverse mortgages are becoming increasingly popular for older Ohioans, who may use a reverse mortgage to supplement Social Security Income, meet unexpected expenses, make home improvements, or simply provide greater financial security and a better quality of life.
But before signing on the dotted line for a reverse mortgage, it's important that you understand the difficulties that can be caused by a reverse mortgage during the probate process.
A reverse mortgage is a special type of home loan that allows a person to convert all or a portion of their home’s value into cash. The equity built up from years of mortgage payments is paid to you. Unlike traditional home equity loans or lines of credit, in a reverse mortgage no repayment is required until you no longer use the property as your primary residence.
To qualify, lenders typically require that you:
The reverse mortgage becomes due when one of the following triggering events occurs:
While reverse mortgages give older Ohioans greater financial flexibility, a reverse mortgage can create complications during the probate process. If you are considering a reverse mortgage, or if you're handling the probate of your parent's estate and they had a reverse mortgage on the property, it’s important that you work with a skilled and experienced Ohio probate attorney who understands the complexities posed by reverse mortgages in probate.
If one spouse dies and the surviving spouse is listed as a borrower on the reverse mortgage, the surviving spouse can continue to live in the home without change to the terms of the loan. When the last borrower dies, adult children and other adult heirs or beneficiaries must pay off the loan.
When a home with a reverse mortgage becomes subject to probate, the loan is treated as an encumbrance on the property and will stay with the property, even if it changes ownership, until the loan is satisfied. The loan is usually satisfied with assets from the sale of the home. Any remaining equity becomes part of the estate and will be transferred to the borrower’s heirs or beneficiaries according to the terms of their Will or Trust.
During the probate process, the heirs or beneficiaries will need to determine whether they want to keep the home, or sell it. If they decide to keep the home, they must pay off the loan balance either by refinancing the home or with other money available to them. If they decide to sell the home, they need to contact the loan servicer regarding their decision to sell the home. Once they have notified the loan servicer of the decision to sell, the heirs or beneficiaries will have between 3 and 12 months to sell the home. The lender typically has the right to approve the sale.
Borrowers who have stayed in the home for many years with a reverse mortgage on the property will accrue more interest, which will decrease the amount of money that will be passed on to the borrower’s heirs or beneficiaries.
In fact, when there is little or no equity remaining in the home, the heirs and beneficiaries may prefer to simply turn the property to the lender to avoid the hassle of selling the home. This is known as a deed in lieu of foreclosure, and can be useful if the borrower owes more than the house is worth and the adult children have no interest in trying to sell it.
However, the loan servicer can initiate foreclosure in as little as 30 days. Therefore, it’s critical that the beneficiaries contact the loan servicer quickly to provide them with required information.
If the home needs to pass through probate, it can take between 60 and 90 days for the heirs or beneficiaries to obtain the necessary documents from the probate court. The loan servicer has the option to extend the deadline to initiate the foreclosure process, but usually will only do so if the home is being actively marketed. Unfortunately, the home often cannot be marketed until an estate representative has been appointed by the court, which often takes more than 30 days.
Another potentially unforeseen problem with a reverse mortgage comes if your circumstances change and you need to move out of your home, to a nursing home, for example. If you do not inhabit the home for more than 12 months, the reverse mortgage comes due. At that point, with nursing home expenses and the cost of repaying a reverse mortgage, you could find yourself facing crushing debt. Also, a reverse mortgage could negatively affect your eligibility to use Medicaid to pay your nursing home bills.
If there is a silver lining, it's that a reverse mortgage is a non-recourse loan, which means that if the amount due on the loan, including interest and fees, is more than what the property will sell for, the beneficiaries are not liable for the difference. If the heirs or beneficiaries sell the property to a bona fide third party, there are no restrictions. However, they cannot sell the home to a family member for less than the loan amount.
If you or a loved one is considering a reverse mortgage, speak to an experienced Ohio probate and estate planning attorney first. If a parent or loved one died and their property is subject to a reverse mortgage, it’s important that you act quickly. Contact an Ohio probate attorney who has experience handling the probate of estates that are subject to a reverse mortgage.
I have more than 23 years experience providing probate and estate planning services to people throughout greater Columbus, including Dublin, Worthington, Westerville, Bexley, Delaware, Upper Arlington, New Albany, Marysville, Hilliard, Delaware, and Newark, and throughout Franklin County, Delaware County, Pickaway County, Fairfield County, Union County, and Licking County. Call or Text (614) 263-5297 any time or complete our secure, confidential, and free online form located on the home page.