A reverse mortgage enables qualified homeowners to generate a consistent income stream from the equity in their houses. Married couples may take out a reverse mortgage on a property they jointly own, or one spouse may do it in their own name.
Divorce brings up a crucial concern: What happens to a reverse mortgage if the marriage ends?
- For homeowners who qualify, a reverse mortgage provides an alternative to a traditional home equity loan for accessing the equity in their properties.
- Refinancing the reverse mortgage or selling the house to pay off the sum are two options available to a divorced spouse for handling reverse mortgage debt.
- By enabling one spouse to stay in the house, reverse mortgages may be utilized to seal a divorce settlement.
- Understanding how the equity that is being given out as income must be returned is crucial before approving a reverse mortgage.
How a Reverse Mortgage Works
A reverse mortgage is a unique kind of financing that enables qualified homeowners to take equity out of their properties. Home equity conversion mortgages (HECMs) are a kind of reverse mortgage that are managed and regulated by the Federal Housing Administration (FHA) (HECMs).
The terms “reverse mortgage” and “conventional home equity loan” or “home equity line of credit” are not interchangeable (HELOC).In either case, the house serves as collateral for the loan, so you are basically receiving a second mortgage on the house. In accordance with the conditions and timetable outlined in the loan agreement, you pay the lender each month. If you don’t make payments on a HELOC or home equity loan, the lender may start a foreclosure process to recoup their money.
The lender pays the homeowner monthly under the terms of a reverse mortgage. The homeowner is not compelled to make any payments. As an alternative, the borrowed equity must be paid back when the borrower:
- Sells the home
- Using the house no longer as their main place of residence (for example, if they move into long-term nursing care)
- Passes away
Reverse mortgages may provide a lifetime of consistent income for a couple, but it’s not free money. When it comes time to pay back the loan, interest and fees will accumulate and raise the total amount owing.
While homeowners are not required to make payments on a reverse mortgage as long as they live in the house as their primary residence, they are still liable for upkeep and maintenance fees, homeowners insurance, and property taxes.
Reverse Mortgages and Divorce
Whether or not either spouse wishes to keep ownership of the house and who is designated as the borrower might affect how a reverse mortgage is handled during a divorce procedure. Divorcing spouses often have a choice between one of three options:
- Sell the house, utilize the revenues to settle the reverse mortgage amount, and then divide the proceeds according to a pre-determined proportion.
- If both couples are co-borrowers, any spouse may decide to stay in the house without making any payments until they stop using the house as their primary residence. However, they could be obligated by their divorce judgment to provide the other spouse a fair share of the equity in the house.
- Refinancing the reverse mortgage into a new reverse mortgage or another form of home loan is an option if one spouse wishes to maintain the house but is not listed as a co-borrower. Again, this could require giving the other spouse a percentage of the equity in the house.
If neither spouse is registered as a co-borrower, selling the house can be the simplest solution. One spouse may continue to live in the house without making any payments if the other spouse vacates while both spouses are listed as borrowers on the reverse mortgage. A reverse mortgage, however, cannot be postponed forever. The remainder would have to be paid in full at some time, particularly when the remaining co-borrower sells the property, vacates the property, or dies.
The reverse mortgage lender may need a copy of the divorce decree if one spouse chooses to stay in the house in order to release the other from the obligation.
Using a Reverse Mortgage to Settle Divorce
In rare situations, a spouse may decide to get a reverse mortgage to pay off debts owed to the other spouse. Consider the scenario where you and your husband decide to seek a divorce but you both want to stay in the house you both co-own. You are required to pay your spouse $100,000 as part of the settlement agreement to “buy them out” of their ownership interest in the house.
Instead of paying $100,000 cash up front, you might get a reverse mortgage if you don’t have it or don’t want to give up a lot of your liquid assets. You may choose the option for a lump sum payment, then utilize the money to reimburse your spouse. You wouldn’t have to pay the reverse mortgage debt until you sold the house, moved out, or passed away.
But it’s crucial to remember that not everyone will be eligible for a reverse mortgage. For instance, in order to be eligible for a HECM, you must:
- Be age 62 or older
- Own the property outright or have paid off the mortgage in full.
- Use the house as your main dwelling.
- not owe any back taxes to the government
- possess the means to pay for maintenance, homeowners insurance, taxes, and insurance on your property.
- Attend a consumer counseling session that has been authorized by the U.S. Department of Housing and Urban Development (HUD)
To be eligible for a reverse mortgage, you must also meet the lender’s income and credit score standards.
You may check for authorized HECM lenders and their criteria using a search engine provided by HUD.
Who Can Qualify for a Reverse Mortgage?
A reverse mortgage is a kind of loan that enables qualified homeowners—those who are at least 62 years old—to access the equity in their houses. They must be the sole owners of the property or have paid off the majority of the mortgage. As long as the borrower resides in the property and uses it as their main residence, there are no payments needed throughout their lifetime. The amount owed on a reverse mortgage in the future may rise as a result of fees and interest.
How Does Divorce Affect a Reverse Mortgage?
If a divorcing couple owes a reverse mortgage, they must choose whether to sell the house or have one of them remain in it. The spouse who is keeping the house but is identified as a co-borrower on the reverse mortgage won’t make any payments as long as they remain in the house. However, the remaining debt will have to be paid in full if they sell it or vacate.
Does a Spouse Have to Be on a Reverse Mortgage?
A reverse mortgage does not need a spouse to be recognized as a co-borrower. If they satisfy the conditions set out by the U.S. Department of Housing and Urban Development (HUD), they may also be identified as a non-borrowing spouse. A spouse’s capacity to remain in the house in the event that the other spouse separates or dies may depend on how they are listed on a reverse mortgage.
The Bottom Line
For retired couples and divorcés, reverse mortgages might provide an additional source of income. Understanding the qualifying criteria and potential financial responsibilities in the event that you sell the house or vacate is crucial before applying for a reverse mortgage. To choose the ideal solution for your circumstances, it’s a good idea to examine the top reverse mortgage providers.
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