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Published: Oct 8, 2022

Updated: Dec 8, 2023

Dispelling the Myths of Reverse Mortgages in Probate

By Jennifer Altreche Gonzalez, Esq.
Reviewed by Andrew David Easler, Esq.

Published: Oct 8, 2022

Updated: Dec 8, 2023

Introduction

A reverse mortgage is a means for elderly homeowners to pull funds from equity in their home without the need to make regular mortgage payments.[1] In a reverse mortgage, the lender provides funds to the homeowner in lump sum or periodic payments, and the homeowner does not have to repay the balance back unless or until certain events happen, such as their death or the sale of the home.[2]

A reverse mortgage lender is essentially taking the risk that the funds they front to the borrower in exchange for a mortgage on the property will be recoverable in the event of the sale of the home or through a foreclosure following the passing of the borrower.[3] Thus, if the proceeds from selling the home at foreclosure are insufficient to cover the balance of the loan, the lender is forced to accept a financial loss.[4]

When the borrower dies, the loan balance becomes due and payable. Under federal law, once this happens, the borrower’s eligible, non-borrowing spouse, the borrower’s estate, or the borrower’s heirs must either pay the outstanding loan balance (with interest), sell the home, provide the lender a deed in lieu of foreclosure, or correct any conditions that gave rise to the balance becoming due and payable.[5]

A borrower’s eligible, non-borrowing spouse is the spouse of the borrower at the time of closing and is not necessarily a borrower themselves. Non-borrowing spouses who meet certain qualifications can have payment of the loan balance deferred in the event the borrower dies.[6] In other words, in some instances, the surviving spouse of the borrower may remain living on the property after the borrower themselves pass.

Since the loan balance becomes due and payable after the borrower dies, reverse mortgages have a particular relevance for probate. This article will seek to dispel some misconceptions people may have about reverse mortgages.

The biggest myths of reverse mortgages and probate

FALSE: The borrower’s spouse will be left with the burden of repaying the loan balance

A borrower’s spouse can have repayment of the loan deferred indefinitely unless the spouse fails to meet certain qualifications. Under federal law the individual requesting deferment must have been the borrower’s spouse at the time of loan closing (when the reverse mortgage was first funded) and have remained the borrower’s spouse for the duration of the borrower’s lifetime.[7]

This individual must have been named as an eligible non-borrowing spouse in the mortgage and loan documents.[8] The spouse must also be using the home as their principal residence, or homestead.[9] Finally, the spouse must abide by any other requirements prescribed by the Federal Housing Commissioner.[10]

After the passing of the borrower, spouses requesting deferment must also establish their legal ownership over the home within 90 days of the death of the borrower and continue to satisfy any other obligations contained in the loan documents, such as maintaining homeowner’s insurance.[11]

FALSE: The Borrower’s heirs will eventually be left with the burden of repaying the loan balance

The lender’s recourse for repayment is limited to the property itself; in other words, the lender can usually only recover by selling the property.[12] The borrower’s heirs are responsible for repaying the loan balance only if they desire to keep the property, but aside from repaying the balance in full, the only other prescribed options for satisfying the loan is for the heirs to sell the home or provide the lender a deed in lieu of foreclosure.[13] Thus, the heirs are not liable for the full amount of the loan if they do not have the ability to pay it in full or if they do not wish to keep the property.

In fact, if there is a foreclosure and the foreclosure price exceeds the loan and cost of foreclosure, the borrower’s heirs may be entitled to the surplus.[14] However, since interest still accrues on the mortgage and no one is paying that interest during the life of the borrower, many reverse mortgage foreclosures never see a surplus after foreclosure.

FALSE: Taking out a reverse mortgage is tantamount to signing the home away

The home will still pass to the borrower’s estate or heirs upon the borrower’s passing.[15] Under a reverse mortgage, when the balance becomes due and payable, the heirs of the home have the option to repay the balance in full instead of selling the home.[16] The borrower’s heirs may still keep ownership of the property. The lender also cannot foreclose on the home if it is occupied by an eligible non-borrowing spouse who has deferred repayment.[17]

In a typical foreclosure action, when the fair market value of the property does not cover the entirety of the outstanding balance, the lender is entitled to the difference.[18] This is called a deficiency judgment. Reverse mortgages insured by the Department of Housing and Urban Development are required to have provisions barring the lender from obtaining a deficiency judgment.[19]

If the proceeds of a foreclosure sale are higher than the balance of the loan, then the distribution of this surplus is governed by statute.[20] Under Florida law, the owner of record is entitled to this surplus.[21] The owner of record is the person who “appear[s]” to be the owner of the foreclosed property on the day the lis pendens is filed; a plaintiff merely needs to allege they are the owner.[22]

As the owners of a property under a reverse mortgage at the time the lender would file for foreclosure, the heirs of the borrower would be entitled to the surplusage from the sale, if any.

FALSE: Reverse mortgage lenders are untrustworthy

There are several safeguards in place to ensure trustworthiness in the mortgage transaction. However, these protections only apply to reverse mortgages which are insured by the Department of Housing and Urban Development.[23]

The provisions of these mortgages are required by federal law to ensure the transaction’s transparency.[24] Before the mortgage can be issued, the lender is required to assess the would-be borrower’s financial capacity.[25]

The lender is required to direct the would-be borrower to Federal Housing Authority approved counselors who will inform them of their rights and obligations under a reverse mortgage agreement.[26]

Homeowners who wish to take out a reverse mortgage are required to undergo this counseling.[27] Thus, homeowners will be equipped with the knowledge they need to assess whether a reverse mortgage is right for them and to assess whether their mortgage lender is complying with federal law.

Conclusion

Reverse mortgages may seem too good to be true, but they are a legitimate source of funds for seniors in their twilight years. With competent legal help, a senior can determine if a reverse mortgage is right for them and ensure all goes well while taking out a reverse mortgage.

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A real estate attorney specializes in property law, helping clients navigate the complexities of buying, selling, and managing real estate, ensuring that transactions comply with state laws and regulations, and providing protection and peace of mind.

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By conducting due diligence and offering strategic legal advice, attorneys play an important role in safeguarding clients’ interests. Whether for individual homeowners or commercial property investors, real estate attorneys mitigate risks, represent clients in court, and assist them with making informed decisions that are legally sound.

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Attorneys who practice business law provide legal advice for starting, managing, and expanding businesses, ensuring compliance with applicable laws. Their expertise covers various duties, including drafting and reviewing contracts, advising on corporate governance, facilitating business transactions such as mergers and acquisitions, forming partnerships, LLCs, and other business entities like DBAs, drafting and reviewing LLC Operating Agreements, and assisting with strategic planning.

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Probate attorneys actively manage the estate administration process following an individual's death, ensuring the distribution of assets aligns with the will or state law, and handle Formal Probate Administration for complex cases, Summary Administration for smaller estates, and Ancillary Administration for assets in other states.

Responsibilities of probate attorneys include filing petitions, appointing personal representatives to manage estate affairs, notifying interested parties to ensure transparency and prevent disputes, helping conduct an inventory and appraisal of the estate's assets, overseeing the payment of debts and expenses, handling probate litigation to resolve any disputes that arise.

They also assist in distributing the assets and formally closing the estate, ensuring all legal and financial responsibilities are met, simplifying the complex probate process, honoring the decedent's wishes, and providing clarity and support to the beneficiaries.

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Wills & Trusts

Will and trust attorneys help draft legal documents to ensure their clients' wishes for asset distribution are executed correctly. They draft personalized and legally compliant wills to designate beneficiaries, appoint executors, and establish trusts for asset management and distribution. It is important to note that wills and trusts are an integral part of the estate planning process.

Responsibilities of wills and trust attorneys include providing legal advice and guidance related to asset protection, minimizing tax obligations, facilitating efficient wealth transfer to designated heirs, offering advice on appointing guardians for minor children, and drafting healthcare directives for unforeseen circumstances.

By providing tailored legal advice and crafting personalized documents, attorneys help clients safeguard their legacies, protect loved ones, and ensure that all documents are both legally compliant and enforceable.

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Estate Planning

Estate planning attorneys provide advice and legal guidance for managing and distributing assets in the event of death or incapacity and assist individuals of various financial backgrounds in preparing essential legal documents such as wills, trusts, and Lady Bird Deeds, and may offer advanced techniques like offshore trusts and family-limited partnerships.

Experienced attorneys offer personalized legal advice, tailoring strategies to meet individual client needs, and assist clients in navigating complex laws and regulations affecting asset management, taxation, and inheritance.

End-of-life planning safeguards wealth and secures a lasting legacy for heirs and charitable causes. Whether estates are modest or substantial, these plans provide invaluable peace of mind and financial security for future generations.

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Civil litigation attorneys manage disputes and represent their clients effectively with various legal matters and issues. They provide clear legal advice and handle all aspects of a case, from preparing documents to gathering evidence and preparing for trial. They also offer guidance and experience to help clients navigate the legal system efficiently, ensuring that cases are managed effectively and lead to timely outcomes.

Civil litigators are also skilled negotiators, often resolving disputes outside of court to save time and maintain relationships, which is particularly vital in business and probate matters.

When trials are necessary, they present and argue cases effectively to minimize losses and secure favorable outcomes. They offer continuous support and guidance throughout the litigation process, simplifying complex legal issues for their clients in both personal and business contexts.

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