New Reverse Mortgage Rules are in Effect this Week

Q. My husband, Rick, and I are considering moving after a stroke limited his mobility, because our home is not completely accessible for him. However, our house is in good repair, completely paid off, and in close proximity to our children and grandchildren.

Another issue we are having is that although it is paid off, we are having trouble affording the taxes and other costs of living in our home, since we rely solely on Social Security payments and Rick’s small pension. I have read about reverse mortgages, but didn’t think we could qualify, since I am under 62 (although my husband is 65). Also, I have heard horror stories about foreclosures when the spouse whose name is on the mortgage passes away and the bank demands the entirety of the loan be paid back by the surviving spouse.

My friend, Sarah, told me yesterday that the rules for reverse mortgages recently changed, and that this can no longer happen. If this is the case, maybe we can stay put in Northern Virginia and modify our home so my husband and I can live comfortably? Do you know anything about these new reverse mortgage rules? Also, will a reverse mortgage affect Medicaid eligibility for my husband if he should need nursing home care in the future? Thanks for your help!

A. It is completely understandable to want to remain in your home, with modifications to make it more accessible for your husband. And for many people in situations similar to yours, reverse mortgages have allowed homeowners to stay in their homes and age in place despite severely reduced income and depleted financial assets.

A reverse mortgage, sometimes known as an HECM (Home Equity Conversion Mortgage), provides money from the equity in your home through a line of credit, monthly payments, or a lump sum. It does not require repayment of the loan until you move, sell the property, or pass away, but the homeowner of course remains responsible for property taxes and insurance and keeping up the maintenance of the home.

Historically, the amount you could borrow with a reverse mortgage has depended on a number of factors, including the age of the youngest borrower. Because of this, mortgage brokers sometimes advised homeowners to leave the younger spouse off the mortgage to increase the amount of the loan. However, as you described, in the past if the borrower died, a surviving spouse who was not named on the loan was often shocked to learn that the loan had to be repaid immediately or else the lender would foreclose on the property.

As your friend mentioned, brand new reverse-mortgage rules kicked in on Monday, August 4, that should provide peace of mind to married couples considering taking out these loans. The new HUD rules, welcomed by consumer advocates, aim to protect surviving spouses.

Below is a summary of the new rules:

• A couple can get a reverse mortgage even if only one of the spouses is 62 or older.
• If one spouse takes out a reverse mortgage and then dies, the survivor can continue living in the home without fear of foreclosure as long as she or he continues making the tax and insurance payments and keeps up the maintenance.
• The non-borrowing spouse must be married to the borrower at the time of the loan closing (and must remain married to the borrower for the duration of the borrower’s lifetime).
• Spousal status must be disclosed at the time of the closing and the non-borrowing spouse must be named in the loan documents.
• The non-borrowing spouse must establish legal ownership (or another ongoing legal right to remain in the home) within 90 days of the death of the last surviving borrower.
• The non-borrowing spouse must meet all of the obligations described in the loan documents. For more details, please see this National Reverse Mortgage Lenders Association summary of HUD Mortgagee Letter 2014-07.
• If the non-borrowing spouse fails to meet any of the requirements, the loan becomes due and payable. (However, the problem for existing non-borrowing spouses facing foreclosures and those expecting foreclosures when their spouses die remains unresolved because HUD is claiming it cannot alter existing legal contracts. There is a lawsuit that was filed February 27, 2014, Plunkett v. Donovan, that addresses this issue, but it is still pending.)
• Additionally, HUD issued guidance that surviving spouses who were left off a reverse mortgage may get up to two 60-day extensions delaying the foreclosure once the loan becomes due and payable — one before a foreclosure is started and one during the prosecution of the foreclosure — if deemed appropriate by the mortgage servicer based on certain criteria.

We hope this new information provides some peace of mind as you decide whether a reverse mortgage is a good option for your family.

You asked about Medicaid eligibility and reverse mortgages. Please note that keeping money in a reverse mortgage line of credit in Virginia, and in most other states, will not count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource. (For Medicaid payment of long-term care, the applicant’s principal residence is excluded from countable resources for the six months of continuous institutionalization provided the applicant intends to return home and provided the equity in the home property does not exceed $536,000. Regardless of the amount of home equity, after six months of continuous institutionalization the nursing home resident’s home will become a countable resource, unless the home is occupied by a spouse, dependent child under age 21, or a blind or disabled child.)

However, transferring the money from the reverse mortgage line of credit to a bank account and leaving it there past the end of the month would convert the exempt home equity into a countable resource and therefore would affect Medicaid eligibility. This important distinction between countable resources and exempt assets is not a simple black and white issue — if you or your loved one is facing the possible need for long-term care, you should get an opinion from a qualified elder law attorney, such as myself. To make an appointment for an introductory consultation, please call 703-691-1888 in Fairfax or 540-479-1435 in Fredericksburg to make an appointment for an introductory consultation at the Farr Law Firm.