HUD has moved to introduce a new element of fairness into reverse mortgages, one which will protect what are called "non-borrowing spouses" or NBS.
Reverse mortgages -- also called home equity conversion mortgages or HECMs -- are a form of financing which allows homeowners age 62 and above to refinance their property in a way that does not require monthly mortgage payments. For example, imagine that the Smiths bought a home in 2002 with a $125,000 mortgage at six percent mortgage rate. The monthly cost for principal and interest is $750.
Today, the Smiths have a $100,000 remaining mortgage balance, but cannot refinance in the normal way because in retirement the income of Mr. Smith has gone down. Instead of a traditional "forward" with monthly payments for principal and interest, the Smiths refinance with an FHA reverse mortgage.
With a reverse mortgage, there are no monthly payments for principal or interest, but the borrower must still pay property taxes, insurance and HOA costs. For the Smiths, this means dumping their current $750 monthly payment for a new loan that has a monthly payment of zero.
How Reverse Mortgages Work for Couples
How do the Smiths qualify for new financing without a strong income? While traditional mortgages look at such issues as credit and paychecks, a reverse mortgage is based on equity. If the equity is sufficient, the loan can be made. The loan will be repaid when the property is sold, the Smiths move, or they pass away.
This brings us to a problem: Sometimes a reverse mortgage is taken out by one Smith and not both Smiths. In this situation, when Smith-the-borrower dies, there is a "non-borrowing spouse" living on the property.
The traditional rule for FHA reverse mortgages has been that when the borrower dies, the loan is "called due and payable upon the death of the last surviving mortgagor," fancy language which means the heirs have a year to refinance the loan or sell the property.
Non-borrowing Spouses Out in the Cold
Typically, a reverse mortgage is originated in the names of both Mr. and Mrs. Smith, but not always: Imagine a case where Mr. Smith gets a reverse mortgage and two years later marries. In this situation, Mr. Smith has a reverse mortgage and the newly-minted Mrs. Smith is not on the note. If Mr. Smith dies, Mrs. Smith has a year to sell or refinance; otherwise, she might face eviction and foreclosure.
Other couples take the younger spouse off the home's title in order to qualify for a reverse mortgage or to be eligible to borrow more money. Once the mortgage has been funded, they may put the non-borrowing spouse back on title, but it doesn't change the fact that the reverse mortgage becomes due and payable when the borrowing spouse dies.
Houses and Spouses
Now HUD has changed the rule to protect non-borrowing spouses. Under the new guideline, the non-borrowing spouse is now treated as if he or she is obligated by the mortgage.
This is a very big deal because under the new rule, the lender cannot force the sale or refinancing of the property until BOTH Mr. and Mrs. Smith die, move, or sell the property, even if Mrs. Smith is not on the loan. In effect, the surviving spouse can stay at the property for the rest of his or her life.
Like all government rules, of course, you have to look at the details. In the case of this new HUD policy, one detail is this: The new guideline does not go into effect until August 4th. That means the protections of the new rule unfortunately do not apply to current reverse mortgage borrowers or those with loan case numbers issued before the August start date. Because some borrowers want to take out a reverse mortgage in the name of only one borrower -- perhaps because one spouse is above age 62 and the other spouse is younger -- it means that in some cases it may be best to get a reverse mortgage after the August start date. Speak with lenders for details.
Reverse Mortgages and Defining Marriage
We live in a time when the definition of "marriage" is in transition and thus so is the meaning of the term "spouse." At this time, for example, 17 states recognize gay marriages while 33 states do not.
HUD handles this conflict by saying that a “'non-borrowing spouse” is defined for purposes of an FHA reverse mortgage "as the spouse, as determined by the law of the state in which the spouse and mortgagor reside or the state of celebration." In other words, if the borrowers have been legally married in any state, they can qualify for the spousal protections of the new federal rule, even if their current state of residence does not recognize their marriage.
For specifics, speak with lenders and shop for rates and terms. Meanwhile, congratulations to HUD for enacting a decent and humane policy to help older borrowers, but how about going a little further and applying the new rule to all reverse mortgage loans, not just those made after August 4th?