Will a reverse mortgage continue to accrue interest even during probate?

5 answers | Last updated: Nov 16, 2016
Russc asked...

If parent signs up for a reverse mortgage and then after 5+ years, passes away, does the loan still accrue interest even during probate? If so, how and when do the heirs know how much of a payoff there is? Is there something that needs to be addressed upfront to avoid problems later on?


Expert Answers

Liza Hanks is the founder and owner of FamilyWorks Estate Planning, a law firm with offices in Campbell and Los Altos, California, and the author of The Busy Family's Guide to Estate Planning (Nolo, 2007).

You should discuss this with the reverse mortgage lender, as terms and conditions will vary.  

Generally, though, the interest on a reverse mortgage is due when the house is sold, so if there's a time delay between the death of your parent and the sale of the house, the estate is responsible for the increased interest on the loan, just as it would be for any mortgage payments due on a traditional mortgage.


Community Answers

Dwight gordon answered...

The answer above is correct. One obtains the payoff for a Reverse Mortgage the same way as for any other - by contacting the servicing lender.

The only activities or questions to consider "up front" are these :

1) Does the family intend to keep the home :

Many folks don't know this, but while HUD/FHA Insurance on a Reverse Mortgage protects the OWNERS against a shortfall, it DOES NOT protect the heirs IF THEY DECIDE TO KEEP THE HOUSE.

Yes, the Heirs can pay off the loan, but they are responsible for the ENTIRE BALANCE, even if that Balance exceeds the home's worth after the cost of the sale.

2) What is the status of the Reverse Mortgage obligation; Is the home likely to be "Short" once sold.

If SO, there are steps one can take IN ADVANCE so that shortage is not considered INCOME back against the estate.

At the time the home is no longer occupied, should their be no equity, is is acceptable to simply turn the home over to HUD.

It would not make sense for the heirs to spend their time and effort in fixing up a home to "sale quality", and investing the time and effort in the sale if there was no benefit to them.

I should note that their are TWO METHODS to have the home remain outside of probate.

A) A Living Trust [Usually used when there are other Assets.]

or

B) A Life Estate Deed [Usuallly used when the home is really the only signifcant Asset.]

In either case, the home passes to the parties specified WITHOUT PROBATE, allowing for a quicker sale and less loss of equity.


Sjolley2 answered...

The short answer is interest, fees and cost continue to accrue until the loan is satisfied. At the same time you have rights and options you should be aware of. Sandy Jolley, Reverse Mortgage Suitability and Abuse Expert


Rainmand answered...

Yes, the Heirs can pay off the loan, but they are responsible for the ENTIRE BALANCE, even if that Balance exceeds the home's worth after the cost of the sale.

That answer is incorrect. If the Reverse Mortgage is negative, the Heirs can purchase the property for 95% of its current value. They don't owe the entire balance.


Sjolley2 answered...

Just to clarify: HUD regulation 24 CFR 206.125 states in part "the heirs may purchase or sell the property for the lesser amount of 95% of the appraised value or payoff of the loan balance."
In order to determine which is the lesser amount - the heirs need to request a payoff statement from the lender and an appraisal. According to HUD regulations the Lender is required to pay for the first appraisal. The first appraisal is valid for a period of 6 months.

As the heirs you have other rights and options you should understand. You can go to the HUD website and look at the HECM Servicing FAQ's which explain in detail what your rights are as to time and repayment of the loan.

If you can't find the HUD FAQ's let me know and I will forward them to you. Sandy Jolley, Reverse Mortgage Suitability and Abuse Consultant