Reverse Mortgage Challenges When in a Care Facility

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Reverse Mortgage Challenges When in a Care Facility

While still residing in their house, a homeowner may be able to access some of the equity by using a reverse mortgage. The borrower may delay repayment of the loan until one of three events—selling the house, passing away, or moving out for a predetermined period of time—causes a reverse mortgage maturity event. The first two are rather straightforward, but the third may be somewhat confusing.

What transpires with a reverse mortgage when the borrower relocates to a care facility is described in this article.

Note that the guidelines for HECMs, the most popular kind of reverse mortgage, which are federally insured, are covered in this article. Review the small print on your loan paperwork carefully to see whether—and, if so, for how long—an absence triggers a maturity event for your specific loan whether you have a proprietary reverse mortgage (also known as a jumbo reverse mortgage) or a single-purpose reverse mortgage.

Key Takeaways

  • When the borrower vacates the property for 12 months or longer, such as moving into a nursing home or other care facility, a reverse mortgage often has to be repaid.
  • If the borrower is married, their spouse may live there provided that certain requirements are met.
  • Co-borrowers who are not spouses may also live in the property.
  • A reverse mortgage may have an impact on a person’s ability to get Medicaid payments to cover long-term care costs.

When the Reverse Mortgage Borrower Is Single

If a reverse mortgage holder who is single and lives alone does not occupy the property as their primary residence for a period of more than 12 consecutive months, they usually have to pay back the loan. So, for instance, a person with a reverse mortgage may stay in their house after spending a few months in a rehab center. However, if they enter a facility and remain longer than that 12-month period, they are deemed to have permanently left and are required to pay back the debt.

If the borrower is married or a single person with a co-borrower, the regulations are different.

  History of Reverse Mortgages

When There’s a Co-Borrower on the Mortgage

More than one borrower may be included in a reverse mortgage. Co-borrowers might be anybody, including spouses (see the part below this).

If a co-borrower is listed on the mortgage, regardless of their connection, that individual may continue to live in the house and receive mortgage payments after their co-borrower passes away or enters a care facility for at least a year. The second borrower’s death or eviction would then trigger the mortgage’s default.

When the Reverse Mortgage Borrower Is Married

Spouses fall into one of three groups for reverse mortgage purposes: Spouse who co-borrows: If the spouse is named on the loan as a co-borrower, they are permitted to live in the house and continue to receive reverse mortgage payments. The same guidelines still hold true if one of the co-borrowers is not the other borrower’s spouse. Non-borrowing spouse who qualifies A spouse was not eligible to be a co-borrower on the loan if they were younger than 62 at the time their spouse obtained the reverse mortgage. However, for reverse mortgages granted after August 4, 2014, they could be indicated as a non-borrowing spouse in the loan documentation. Provided they were, and if they also met certain other requirements, they may stay in the house after the other spouse had left for more than a year.

The other requirements are that:

  • The loan cannot be in default due to things like missed insurance or property tax payments.
  • The non-borrowing spouse must have been and been lawfully wed to the borrowing spouse at the time the mortgage closed.
  • If the non-borrowing partner was in a “committed relationship” with the borrower at the time the mortgage closed and later got married legally (“prior to the borrower’s death,” the language says), and “remains married to the HECM borrower, in situations where the HECM borrower has resided in a healthcare institution for more than two years,” the non-borrowing partner may be eligible.
  • When the mortgage was closed, the non-borrowing spouse had to continue be residing there as their primary home.
  Mortgage Rate Lock Float Down Definition

Note that non-borrowing spouses are not eligible to receive payments from a reverse mortgage like co-borrowers are.

Non-borrowing spouse who is ineligible—Spouses who don’t fulfill the requirements to be labeled “eligible” cannot stay in the house if their partner leaves for more than a year (unless they are able to work out an arrangement with the lender).The reverse mortgage becomes due at that time. Anyone else who could be residing in the house at that time must either leave or purchase it outright and pay off the mortgage, not including other family members.

Reverse Mortgages and Medicaid Eligibility

Medicaid is often used by Americans to cover nursing home or other long-term care costs. (Medicare only covers expenses in a very small number of situations.) Medicaid has tight asset and income restrictions that might vary from state to state. Reverse mortgage payments are not regarded as income, yet if they are not used, they may be regarded as assets. Up to a specific amount (usually $636,000 or $955,000 in equity, depending on the state), a Medicaid applicant’s house is an exempt (or “non-countable”) asset. A single individual who has a reverse mortgage must sell their property and pay off the reverse mortgage if they stay in a care facility for 12 months or longer. If there is any money left over, it will count against them for Medicaid eligibility and become a non-exempt asset. They would then have to use that money to cover their own treatment in order to be eligible once again. The spouse who stays in the house in a married marriage is referred to as the “community spouse.” The community spouse is allowed to live there for the rest of their lives, however the state may seek to seize property when the community spouse passes away in order to recoup the costs that Medicaid covered for their care.

  Shared Appreciation Mortgage (SAM)

Where can you get a reverse mortgage?

The most popular form, home equity conversion mortgages (HECMs), are only offered by lenders who have been certified by the Federal Housing Administration (FHA).Some lenders also provide reverse mortgages that are exclusive to them.

Can you use a reverse mortgage to pay for a nursing home or an assisted living facility?

Yes, you may use a reverse mortgage anyhow you like. You may even use it to pay for home improvements or care that would enable someone to stay in their home rather than entering a care facility (or postpone the day when that would become necessary).

What is a Medicaid spend-down?

Spending enough of your non-exempt assets to qualify for Medicaid benefits is known as a Medicaid spend-down. States have a look-back period, usually running back 60 months, during which you cannot have given assets away or sold them for less than their market worth. There are severe restrictions on what you are allowed to spend money on.

The Bottom Line

When the last borrower passes away, sells the house, or vacates the property for 12 months or more, the reverse mortgage is often required to be repaid. This restriction can become problematic if a borrower enters a care home and is unable to leave and return within a year. Any co-borrowers, however, are permitted to live there without causing the debt to become due. Furthermore, if the borrower had a non-borrowing spouse living in the property, that individual could be allowed to do so provided they met specific requirements.

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