Consumer safeguards for reverse mortgages weren’t always as strong as they are now. Although some bereaved spouses are less likely to be forced out of their homes because to new regulations, not all of them are protected. They also don’t provide protection from poverty.
Even yet, less danger exists now for eligible non-borrowing spouses than in the past, particularly for those who are thinking about a new reverse mortgage. Here are some things you should be aware of about the safeguards offered to non-borrowing spouses as well as the potential hazards they may encounter, regardless of whether you are currently one, are thinking about becoming one, or know someone who is.
- For qualified non-borrowing spouses, new reverse mortgage legislation that went into effect in September 2021 provide more safeguards than before.
- When the borrowing spouse passes away or permanently relocates to assisted living or a nursing facility, the new legislation may be able to allow qualified non-borrowing spouses stay in their homes.
- Non-borrowing spouses who are ineligible nevertheless have little safeguards.
- After the borrowing spouse passes away or separates, neither kind of non-borrowing spouse is eligible to receive funds from the loan.
- The non-borrowing spouse’s rights are still impacted by the date the borrower received their reverse mortgage.
Non-Borrowing Spouse Protections Before Aug. 4, 2014
If you have an older reverse mortgage, it is important that you be aware of its history. It is also useful if you have a newer loan or are thinking about getting one.
Even if the younger spouse was at least 62 years old and so qualified to be a co-borrower in the past—specifically for HECMs with case numbers established before August 4, 2014—the older spouse could have decided to be the only borrower in order to get more money from the loan (age is a factor in how much you can get, with younger getting less).It’s also possible that the borrower’s spouse gave up their ownership interest to facilitate the loan. After all, if they choose for the lump sum reverse mortgage payment plan, both spouses would profit from the money.
Many widows and widowers tragically found themselves without a place to live when the borrower passed away. The house served as the loan’s security, and the lender was within its rights to foreclose.
The Jones Case
An important court ruling from 2018 explains why the previous regulations were unsatisfactory. On July 28, 2014, Caldwell Jones, a superb basketball player for the Philadelphia 76ers in the 1980s, obtained a reverse mortgage. On September 21, 2014, he passed away abruptly. The loan servicer started the foreclosure procedure in accordance with the reverse mortgage’s provisions. His non-borrowing spouse, Vanessa Jones, filed a lawsuit but eventually lost.
She could have won—or never needed to bring action in the first place—had the loan’s case number been allocated on or after August 4, 2014, when the FHA first amended borrowing regulations to protect non-borrowing spouses.
After the applicant files an application but before the loan closes, the FHA assigns loan cases numbers. Once an applicant’s property address, Social Security number, and other loan details provided by the lender have been verified by an FHA system, the case number is designated.
Improvements to Non-Borrowing Spouse Protections
“The non-borrowing spouses were not taken into account when the note, deed, or loan agreement was created from 1989 to August 4, 2014,” claims Dan Hultquist, a national reverse sales training expert with Fairway Independent Mortgage Corp. in Canton, Georgia. In essence, legislative obligations and HECM contracts were at odds. Since then, HUD has required that wording establishing specific rights for spouses be included in every HECM loan.
Although it was possible for widows and widowers to refinance their homes and pay off their reverse mortgages, they weren’t always eligible to do so.
When the final borrower passed away on June 15, 2015, HUD made it possible for reverse mortgage loan servicers to assign pre-August 4, 2014 loans to HUD rather than having them become due and payable. However, allocating the debt was a choice rather than a mandate. In these situations, lenders might have foreclosed and still could.
The good news is that, according to Hultquist, many HECM loans “are already allocated to HUD before the death of the previous borrower,” protecting many pre-August 4, 2014 non-borrowing spouses from losing the house.
Non-Borrowing Spouse Protections on or After Aug. 4, 2014
For reverse mortgages with case numbers assigned on or after August 4, 2014, HUD increased non-borrowing spouse safeguards. It altered the legislation so that freshly created loan contracts would let non-borrowing spouses to remain in their houses upon the death or permanent placement of a borrowing spouse in a care facility.
It’s a common myth that since that time, all non-borrowing spouses have been shielded from losing their homes. The agency said in Mortgagee Letter 2014-07, “FHA has no ability to modify its customary view with regard to current loans since it is ingrained in existing, legally binding contracts.”
Additionally, making modifications in the past can jeopardize the Mutual Mortgage Insurance Fund. This fund prevents homeowners and their successors from ever paying more on a reverse mortgage than the house is worth while also limiting losses for lenders.
2021 Reverse Mortgage Changes
Since 2014, HUD has made many further changes to its reverse mortgage regulations, each time enhancing safeguards for spouses who are not borrowers. Mortgagee letters (MLs), which HUD releases as new regulations, underwent the most recent revisions in 2022 with ML 2022-06. (also called ML 22-06).Other significant modifications were made via letters in 2015, 2019, and 2021.
For widows and widowers who were not debtors, the new regulations simplify several processes. For starters, regardless of the reverse mortgage case number, they no longer need to provide evidence that they are listed on the title in order to continue living in the house. Additionally, they shield eligible non-borrowing spouses from losing their house in the event that their borrowing spouse does not pass away but instead settles permanently in a healthcare institution.
However, this protection is only assured if the reverse mortgage of the borrowing spouse is dated August 4, 2014 or after. If not, it is dependent on whether the lender transfers the debt to HUD. In other words, the pre-Aug. 4, 2014, non-borrowing spouse issue was not entirely resolved by the most recent modifications. Very few people in the business, according to Hultquist, “understand the intricacies included in ML 15-02, ML 15-15, and ML 21-11.”
Additional Protections for Non-Borrowing Spouses
Both partners must successfully complete a counseling session with a HUD-approved HECM counselor before either may apply for a reverse mortgage. They may learn more about the effects of not include one spouse in the loan at this conference. Additionally, to assist clarify the non-borrowing spouse’s rights, HUD has made a distinction between eligible and ineligible non-borrowing spouses since 2015. (or lack thereof).
If they are married before the borrower passes away, same-sex couples who were in serious relationships but weren’t able to legally wed at the time the reverse mortgage was arranged are nonetheless protected under the law as eligible non-borrowing spouses.
Eligible vs. Ineligible Non-Borrowing Spouses
The borrower’s eligible non-borrowing spouse resides with them as their primary abode in the mortgaged property. If the borrowing spouse passes away or vacates the property first, they are given safeguards that allow them to stay. Additionally, the age of the eligible non-borrowing spouse affects the amount of equity that the borrowing spouse may access via the loan.
According to Hultquist, you cannot get a HECM in Texas with a qualified non-borrowing spouse. Technically speaking, he claims, Texas law does not outright forbid it. Instead, because of unfavorable state regulations, lenders are reluctant to provide the choice.
Either the spouse of an ineligible non-borrower does not dwell with the borrower in the mortgaged property at all, or the house is not their primary residence. When the loan closed, they may not have been wed to the borrower. If the borrowing spouse passes away or leaves the house first, they are not given safeguards that would allow them to stay. The profits of the reverse mortgage are not based on the age of this spouse.
If you do get a reverse mortgage while you are still married to your younger, non-borrowing spouse, they will be legally identified as either an eligible or ineligible non-borrowing spouse at closing. If the borrowing spouse passes away before the eligible non-borrowing spouse, this paperwork safeguards their right to live in the house during the deferral period.
Retaining the Right to Live in the Home
If the borrowing spouse passes away or vacates the property first, the eligible non-borrowing spouse will be entitled to continue living there as long as they continue to adhere to the reverse mortgage’s other conditions, which include maintaining the property and paying property taxes and insurance. They enter a time known as a “deferral period” by HUD, during which the lender will not demand repayment of the reverse mortgage.
Non-borrowing spouses’ legal rights might be complex. Consult a real estate or elder law attorney, an independent financial adviser, or a reverse mortgage counselor who has been authorized by the HUD if you have any queries regarding your situation. You should seek out a specialist with knowledge of reverse mortgages since many legal and financial experts lack it.
The delay period may still cause financial difficulties for certain debtors. The non-borrowing spouse is not eligible to receive any further reverse mortgage profits since they are not a borrower on the loan, regardless of the reverse mortgage case number date. They cannot assume the borrowing spouse’s debt or be added to the loan without refinancing.
Why Can’t I Borrow As Much If I Have an Eligible Non-Borrowing Spouse?
The life expectancy of the borrower is included into the revenues of the reverse mortgage. The longer the borrower or non-borrowing spouse occupies the property, the more probable it is that the loan total will surpass the property’s worth. The Mutual Mortgage Insurance Fund of the Federal Housing Administration (FHA) suffers a loss as a result. Younger homeowners are limited in how much they may borrow to help keep the fund sustainable.
How Can a Non-Borrowing Spouse Gain Better Protection?
The non-borrowing spouse must first confirm that their name appears on the property’s title. And if it is, they need to prevent its removal.
In order to avoid losing their home in the event that the borrowing spouse passes away, the couple should also make sure that the non-borrowing spouse can continue to pay their homeowner’s insurance and property taxes.
Third, the couple may choose to postpone taking out the loan until they are both at least 62 years old. Alternatively, they should prepare to refinance from a home equity conversion mortgage (HECM) to a HECM as soon as the younger spouse reaches the required age of 62 and is qualified to do so.
According to Hultquist, “extremely low closing costs are typical for this sort of refinancing because of the way HUD calculates the upfront mortgage insurance fee.” However, he continues, refinancing may not be the wisest course of action if the surviving spouse intends to sell the house.
What Non-Borrowing Spouse Protections Do Proprietary Reverse Mortgages Have?
Non-FHA reverse mortgages (HECMs) differ significantly from FHA reverse mortgages (HECMs) in a number of respects, and each lender has distinct characteristics. As a result, every customized reverse mortgage product has a distinct approach to potential borrowers who have non-borrowing spouses. According to Hultquist, some lenders won’t approve a reverse mortgage for a homeowner who has a non-borrowing spouse. Others, he claims, will modify the interest rate, loan terms, or necessary loan-to-value ratio to take the non-borrowing spouse into consideration.
What Has Happened to Non-Borrowing Spouses With Older Reverse Mortgages?
The contract between the borrowing spouse and the reverse mortgage originator governs the non-borrowing spouse’s rights, according to courts, even though the purpose of federal legislation is to prevent non-borrowing spouses from losing their house when their borrowing spouse passes away. For some couples who do not borrow, this danger nevertheless remains. The non-borrowing spouse might still lose the house if the reverse mortgage case number was given by the U.S. Department of Housing and Urban Development (HUD) before August 4, 2014.
The Bottom Line
A surviving spouse must cope with sorrow as well as the feelings and inconveniences of relocation if they have no right to remain in the property under the reverse mortgage arrangement and no assets to pay back the debt. This is a terrible potential, and thanks to stricter legislation, fewer borrowers should have to deal with it in the future. These safeguards, however, only apply to HECMs, putting proprietary reverse mortgage borrowers at a higher risk.
Carefully read your contracts. Get a neutral professional to explain your contract to you if possible. If you discover that it doesn’t state what you believed it did, you may then take appropriate action.
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