People considering a reverse mortgage should be aware of an important requirement -- that they must continue to live in the home after they take out the mortgage. Otherwise, the loan becomes due and payable.
So, what happens if a reverse mortgage borrower enters a long term care (LTC) facility? Will he or she end up in foreclosure? The residency requirement isn't a bogeyman to fear, but it is something that requires thorough understanding.
HECM Residency Requirement
About 90 percent of all reverse mortgages today are Home Equity Conversion Mortgages (HECMs), which are backed by the US Department of Housing and Urban Development (HUD). HUD's guidelines state:
The borrower must maintain his/her principal residence in the
property securing the HECM loan. He/she may not leave the
property for more than 12 months.
If you enter and remain in a care facility for more than 12 months, your reverse loan would be payable immediately. If you were receiving monthly checks from your reverse mortgage proceeds, those checks would stop.
However, there are some limitations to this policy.
First, if your spouse remains in the home, you're safe -- as long as he or she is also on the reverse mortgage. Some younger spouses have found themselves subject to eviction when they willingly dropped themselves from the home's title in order to increase the amount the couple could borrow with a reverse mortgage. When the older spouse died or had to enter a nursing facility, the reverse mortgage became due -- and the younger spouse was only considered a tenant, subject to eviction -- even in community property states. In other cases, the borrowing spouse left the home because of divorce or separation; the non-borrowing spouse had zero protection.
Second, if the elder spouse dies or enters long-term care, the younger spouse may be able to refinance the HECM and remain in the home. However, this is not guaranteed. It depends on the younger spouse's age and the amount of home equity available.
Third, as a practical matter, your mortgage servicer has to be notified that you've vacated the home before it can call your loan due and payable.
Finally, you're allowed to have other people live in the home with you -- SO IT MIGHT MAKE SENSE TO TAKE YOURSELF OUT OF LONG TERM CARE AND HAVE LIVE-IN HELP, CARE FROM FAMILY MEMBERS OR HOME HEALTH CARE instead of moving to a facility.
Here's what HECMCounselors.org has to say about residency requirements:
HECM borrowers must live in the home as their primary or principal residence in order to keep the HECM loan. Principal residence means
- “Where the borrower typically spends the majority of the calendar year”
- “Where the borrower maintains their permanent place of abode”
- Functionally, the borrower could be away for up to 6 months of the year and still claim the home as their primary residence. Longer absences may be possible if approved on a case-by-case basis by the servicer.
- Borrowers are advised (not required) to notify the servicer if they plan to be away more than 2 months. Servicers must verify residency at least annually, and if borrowers do not respond promptly to these requests, the servicer might assume that the property had been abandoned. Shutting off utilities may also be seen as a sign that the borrower has vacated or abandoned the property.
- If there are two borrowers, the loan stays in place indefinitely, as long as at least one borrower maintains the home as their principal residence.
- If the last surviving borrower cannot live in the home due to health conditions, they are permitted to be away from the home for as much as 12 consecutive months before the loan would be called due and payable.
- There is no restriction on other people living in the home. For instance, there is no problem with having one of the borrower’s children living in the home, or having a health care worker or other staff person living in the home.
- The borrower is NOT permitted to rent the entire property to someone else and live somewhere else.
- Short-term rentals (e.g., of a home at the beach during the tourist season) may be permitted. Borrowers should check with the servicer if they plan to do this.
Requiring long-term care doesn't necessarily mean you have to terminate your reverse mortgage. Understand your alternatives now in case you have to make a decision later.