How Does a Reverse Mortgage Affect Estate Planning?

A reverse mortgage is a form of home equity loan available to seniors age 62 or older. The loan doesn’t have to be repaid until the death of the homeowner, or if the homeowner moves out of the residence.

A reverse mortgage can provide a source of funds in retirement, but it can also leave your estate with a significant bill to pay after you die. You do have alternative options to tapping your equity, however. Learn about the pros and cons of using reverse mortgages and other home equity products.

Key Takeaways

• Your reverse mortgage must be paid off at the time of your death.
• Your heirs can buy the property, refinance the loan, sell the home, or even turn it over to the lender to satisfy the reverse mortgage debt.
• Heirs may have as little as 30 days to resolve your reverse mortgage after your death.
• You might also consider forming a living trust to hold ownership of the property.

How a Reverse Mortgage Works After Death

Your heirs or estate should receive a “due and payable” notice shortly after your death. The notice will explain their options to pay off the loan. They can sell the property, turn it over to the lender through a deed in lieu of foreclosure, or buy it from the lender within 30 days. They may also have the option of refinancing the reverse mortgage loan, depending on the lender.

The amount of money required to satisfy the reverse mortgage obligation will be either 95% of the property’s appraised value or the loan balance, whichever is less, if you’ve taken out a Home Equity Conversion Mortgage (HECM) that’s insured by the federal government. The FHA will pay off the remainder of the loan balance if 95% of the appraised value is less. HECM reverse mortgages are the most common type of reverse mortgage.

Note

HECM loans provide special provisions through the U.S. Department of Housing and Urban Development (HUD) to allow certain spouses who are not co-borrowers on the loans to remain in their homes.

Options To Avoid a Reverse Mortgage Entering Probate

Your reverse mortgage loan would not be included in probate of your estate if one or more of your heirs purchases or sells the property. Either action removes it from the probate process, provided that the home isn’t purchased with money from the estate. The funds must come from another source to keep the transaction out of probate.

That 30-day timeline for your heirs to make a decision regarding what to do with the property can sometimes be extended up to a year. They may be able to get this extension if they need additional time to sell the home or to arrange their own financing to buy it.

Consult with an attorney or call a HUD housing counseling agency for assistance if you want to extend the 30-day deadline.

Your heirs also have the option of simply relinquishing the home to the lender through a deed in lieu of foreclosure. This is a document that voluntarily transfers ownership to the lender without forcing it to go through the legal process of foreclosure.

Note

The reverse mortgage is a secured claim that’s satisfied by its collateral, so it’s neither an asset nor a debt that must be handled by the probate estate.

How To Prepare Your Estate for a Reverse Mortgage

You might also consider forming a living trust to hold title to your property and by extension, be responsible for resolving the loan against it after your death. You can include your intentions for the property as part of the trust agreement or formation documents. Your trustee or successor trustee would have to honor them.

You might dictate that the loan should be paid off from the sale of other trusts assets so the home can be passed to your beneficiary or beneficiaries. Property held in a living trust isn’t subject to probate or a probate court’s directives or orders.

Consider consulting with an attorney for help creating your estate plan to account for a reverse mortgage. At the very least, you’ll want to let your heirs know that the loan exists so they can be prepared.

Frequently Asked Questions (FAQs)

Does probate always have to occur first when a reverse-mortgage borrower dies?

Ownership of a deceased’s assets must be transferred to a living beneficiary after death because the deceased can’t legally own property. Nor can they owe debts, so the probate process is required to both transfer ownership of assets and to pay off outstanding financial obligations if no other provisions are made to do so. Probate of a reverse mortgage borrower’s estate wouldn’t be required if these two post-death obligations were met.

Why would you get a letter from the probate court about your parents’ reverse mortgage?

The probate court or your parents’ estate executor might notify you that a reverse mortgage exists to make sure you are aware of it and that you understand your options.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

1. U.S. Department of Housing and Urban Development. “What You Need To Know if You Inherit a Home That Is Security for an FHA Home Equity Conversion Mortgage (HECM).”
2. Consumer Financial Protection Bureau. “What Happens to My Reverse Mortgage When I Die?”
3. Consumer Financial Protection Bureau. “If I Have a Reverse Mortgage Loan, Will My Children or Heirs Be Able To Keep My Home After I Die?”

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