The Department of Housing and Urban Development has issued a new rule to protect spouses of reverse mortgage holders from eviction after the borrower passes away.
To qualify for a Home Equity Conversion Mortgage (HECM), the most popular type of reverse mortgage, a homeowner must be age 62 or older. In the past, if a HECM borrower had a spouse under age 62, the spouse had to be left off the loan. Even if both spouses were over 62, the younger spouse was often omitted from the loan because that enabled the homeowner to borrow more money. The amount that can be borrowed increases with the age of the borrower.
The problem: Under those rules, the younger non-borrower spouse could end up evicted from the home when the borrower spouse died. Why? Because at the death of the borrower, the younger spouse who wanted to remain in the home was required to pay the loan in full. This was not possible in many cases, particularly given the recent financial crisis that pushed property values below the loan amount.
HUD's new rule is aimed at better protecting younger spouses from being evicted from their homes. Effective August 4, 2014, a spouse over 62 who takes out a reverse mortgage may list a younger spouse as a "non-borrowing spouse." Should the borrower die first, the non-borrowing spouse will be entitled to remain in the home if two conditions are met:
- The non-borrowing spouse must provide proof within 90 days of the spouse's death that he/she is entitled to remain in the home. Documentation may include a lease, deed, etc.
- The non-borrowing spouse must continue to meet all other financial obligations associated with the reverse mortgage - pay property taxes, pay insurance premiums, etc.
This is good news, but pay attention to these three important caveats:
- Unlike the borrower, the non-borrowing spouse may not access the loan balance.
- The new rule applies only to non-borrowing spouses who were married to the borrowing spouse at origination of the loan. Spouses who marry the borrower after the loan is taken out are not protected.
- The amount of the reverse mortgage will now be based on the age of the younger spouse, hence less money will be available the borrower.
To read the new HUD rule in its entirety, click here.
Many of my clients who need cash have found the reverse mortgage to be a useful tool - a lifesaver, even. But approached without full awareness of its financial and legal implications, a reverse mortgage can become a nightmare. The process is not the cakewalk or panacea some television commercials would have you believe. As with any financial product, you should do your homework and proceed with caution.