Reverse mortgages are often a desirable form of financing for homeowners, a way to take cash from the property without moving. However, lurking in the rules and regulations has been the question of how to handle non-borrowing spouses (NBS) -- spouses who for various reasons are not obligated by the reverse mortgage and not listed on the home's title. Now, once again, HUD is trying to resolve a very difficult and messy problem with new rules for its Home Equity Conversion Mortgages (HECMs). HECMs make up about 90 percent of all reverse mortgages sold in the US, and that's the type of reverse mortgage being discussed in this article.
Why a Reverse Mortgage?
Let's imagine that you've owned your home for many years and that it's worth $400,000 and you owe just $100,000. One way to trade that $300,000 in home equity for cash is to sell the property and move into something cheaper -- perhaps a $200,000 condo. However, selling and moving can be very expensive (experts estimate the costs of selling one home and moving at about ten percent of the sales price of the old house). In that case, you'd sell the old house for $400,000, pay off the $100,000 mortgage, pay $40,000 in selling, buying and moving costs, and spend $200,000 for the new place. In the end you'll have $60,000 and be living in a cheaper and possibly less desirable dwelling.
Rather than moving and selling, you might consider a reverse mortgage that allows you to age in place while at the same time pulling cash from your real estate equity. A reverse mortgage could allow you to pay off your $100,000 home loan, freeing you from mortgage payments, and let you pull out additional cash in the form of a line of credit, monthly payments or a lump sum -- all without the hassle of moving and the $40,000 loss right off the top.
Unlike a regular ("forward") loan, the HECM offers three interesting advantages:
- First, the maximum size of the loan depends on the amount of equity available, rather than (in most cases) your income. There are exceptions for those who can't or don't pay their property taxes, insurance and home maintenance costs.
- Second, with a reverse mortgage, there are no monthly payments required -- however, the homeowner must continue to pay property insurance and taxes.
- Third, government-backed reverse mortgages are a form of non-recourse financing. This means only the value of the home is security for the loan. If the mortgage is not fully repaid from the sale of the property, the lender can only recover its loss from FHA.
Reverse Mortgages and Non-borrowing Spouses
HECM reverse loans are available to those aged 62 and above. This limitation is a source of the considerable difficulty for many married borrowers.
Imagine that John Smith turns 65 and has a home with considerable equity. However, his wife is younger than 62, which disqualifies her from taking our a reverse mortgage. The only way for John to get a reverse mortgage is for his wife to remove herself from the property title (usually by signing a quit-claim deed). Other couples sometimes choose to remove a younger spouse who's over 62 from the home's title in order to be eligible to borrow more (maximum reverse mortgage proceeds are calculated using the age of the youngest borrower).
Under old rules, this presented a problem for the younger spouse if the older one died first. When the borrowing spouse died, the non-borrowing younger spouse either had to vacate the property or find another way to pay off the loan. The NBS rule has led to some nasty results, with elderly spouses being evicted from their homes. In fact, in June 2014, HUD issued a letter in response to a court challenge to its NBS policy saying it no had authority to prevent such evictions.
New Reverse Mortgage Rules
Beginning August 4, 2014, HUD is instituting a new policy. The basic deal is this: non-borrowing spouses can remain in the home after the death of the borrowing spouse. No more evicting people because of their status.
However, there are significant downsides. The age of the non-borrowing spouse affects the amount that can be borrowed because this person now has the right to remain in the residence indefinitely. So the presence of a NBS reduces the amount that can be borrowed. In the example above, for example, a 70-year-old borrower with a 60-year-old NBS under the old rule could pay off the $100,000 mortgage and also get $702 a month as long as he or she remained in the residence. Under the new rule, that monthly payment drops to $500.
There are a few more caveats:
- The new rules only apply to new reverse mortgages, meaning that non-borrowing spouses with existing reverse mortgages are not protected.
- The spouse must be "disclosed to the mortgagee at origination and specifically named as a Non-Borrowing Spouse in the HECM documents." If a borrower remarries, the new NBS is not protected under the rule, but presumably the old one is -- which could get interesting.
- Some people live together and do not get married. Unmarried couples are not protected under this rule -- however, this could be an advantage if they don't wish to have their payout reduced and they have provided for the death of the borrower.
Reverse loans are complex, and that's why the government requires borrowers and spouses to attend reverse mortgage counseling from HUD-approved providers before taking out a government-backed reverse mortgage. In addition to shopping around for the best rates and programs, consider consulting with a financial planner, elder law attorney or tax advisor. Make sure you have a will and other required documents in place when considering such specialized financing.