Senior Resources

Reverse Mortgage Info

Reverse Mortgage Info

Is a Reverse Mortgage right for you and your family? It is certainly not something to enter into lightly. There are many factors to consider and each person’s situation is unique. Here is some basic info about reverse mortgages. If you would like to learn more from a reverse mortgage specialist, Contact Me for my preferred lenders.

Reverse Mortgage – Home Equity Conversion Mortgage (HECM)

The main benefit of a reverse mortgage is allowing a homeowner to tap the built-up equity in the home by receiving immediate cash, lifetime payments, or a line of credit. Homeowners can live in the comfort and privacy of their own homes and with the security of stable income. The home cannot be lost to foreclosure because the borrower makes no payments to the lender.

Neither the homeowner nor the heirs will ever owe more than the home is worth, even if the home value declines or payouts exceed the value. The lender cannot seek other assets to make up for a shortfall. If the homeowner or heirs try to sell the property in an arms-length (not to a relative) sale and the proceeds fall short, the remaining mortgage balance is excused. Mortgage insurance compensates the lender for a shortfall. The IRS does not consider money borrowed through a reverse mortgage taxable income.

A reverse mortgage requires the property to be owned debt-free. It is possible, however, to pay off another mortgage with a lump sum from the reverse mortgage as long as the other mortgage is not in default.

When Is a Reverse Mortgage Not a Good Idea?

When a homeowner does not have much equity in the property—less than 40 percent—or the property value is low, the amount available through a HECM will likely be insufficient to offset the costs. HECM costs outweigh the benefits if the borrower’s needs are short term or modest. It is usually not the best choice for someone who will likely need nursing home care in the near future. Obviously, the HECM is not meant for flipping properties. As we have seen, the costs associated with reverse mortgages are high; it is not “free” money. If the homeowner does not have a compelling need to draw out the equity, there is no good reason to pay for a HECM loan.

Because of the residency requirement, a reverse mortgage cannot be used to buy into a Continued Care facility or pay for a nursing home stay of more than 12 months, unless, for example, one spouse continues to live in the home. Payout from a reverse mortgage could, however, be used to pay for long-term care insurance, which would cover a future nursing home stay. Newly constructed homes are eligible if occupied within 60 days.

What Do Heirs Receive if Home Has a Reverse Mortgage?
When the last surviving homeowner passes away, the remaining equity in the property goes to the heirs, not the bank. But heirs must either pay off the loan to keep the home or sell it to access the equity. Heirs have a choice to sell (must be an arms-length sale) the house to pay off the debt, pay off the debt from another source, or obtain a new forward mortgage on the home. Obviously, the heirs must meet mortgage underwriting criteria for a forward mortgage. If the house sells for less than the mortgage balance, the lender is compensated for the difference by FHA insurance. If there are no heirs, the bank may take possession of the home and sell it. The estate may retain ownership of the property but it must pay off the loan. Spending down the equity in the home, however, reduces the value for estate tax purposes.
Although heirs are not responsible for the debt accrued on the home, they do need to understand fully the mechanics of the reverse mortgage and their options when the loan comes due. Although they receive the remaining equity, if any, heirs must pay off the loan with other assets, sell, or refinance with a new forward mortgage. If heirs want to keep the property but can’t pay off a loan or qualify for a mortgage, they may feel unfairly deprived of an expected inheritance.

Impact on Medicaid, SSI, Medicare and Social Security

Payout from a reverse mortgage doesn’t impact Social Security or Medicare benefits. But a recipient of need-based programs, like Medicaid and Supplemental Security Income (SSI), must be careful that the payout does not exceed liquid-asset limits. As noted earlier, reverse mortgage payouts can impact Medicaid eligibility even though home equity is not a countable asset. An estate recovery or TEFRA lien placed on a reverse-mortgaged property will prevent an heir from selling the home without first reimbursing Medicaid. A lien could also complicate matters if a spouse of a beneficiary wants to obtain a reverse mortgage because the home must be debt free. It is always a good idea for clients to consult with the local public benefits offices for information and clarification before taking any action.

It is important to be aware of state regulations when you may anticipate doing a reverse mortgage or selling a home before moving into a care facility. If you plan to apply for Medicaid benefits, it would be wise to consult with an attorney specializing in elder care issues.

Counseling—The Important First Step

Counseling is the first step in the HECM application process. Don’t underestimate importance of counseling session. It must be completed before going forward with application process. A Certificate provided by counselor becomes part of the application file. Anyone who will be involved in decision making, such as other family members or an attorney, can participate in counseling session. The lender, however, cannot schedule or participate in counseling session.

Counselors may charge a fee, up to $125, but they must inform the client in advance. Some nonprofit agencies provide the counseling at a reduced or no charge, based on the ability to pay; they cannot refuse on the basis of inability to pay. The fee can be paid out of pocket or out of the loan proceeds.

Things to Consider When Weighing a Reverse Mortgage Against Selling Your Home

  • Quality of life.
  • Net sale proceeds.
  • Cost to buy or rent a new home or reside in a congregate or assisted-living community.
  • Availability of alternative income-producing investments, potential earnings, and ability to manage the investment.
  • Availability of community-based support services and public benefits.

More Resources

AARP Reverse Mortgage Info

HECM Counselors

National Foundation for Credit Counseling

National Council on Aging

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