Reverse Mortgage Challenges in a Care Facility

A reverse mortgage can allow a homeowner to tap into some of the equity in their home while they still live there. The loan does not need to be repaid until one of three things that can trigger a Reverse Mortgage Maturity Event occurs: the borrower sells the home, the borrower dies, or borrower moves for a number of months. The first two are pretty straightforward, but the third can be quite confusing. This article explains what happens with a reverse mortgage when the borrower moves to a care facility.

Note that this article covers the rules for Federally Insured Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage. If you have a Homeowner Reverse Mortgage (also called a Jumbo Reverse Mortgage) or a One-Time Reverse Mortgage, carefully review the fine print of your loan document to see if, and if so, how long, a no-show triggers a maturity event for your particular loan.

Key points to remember

  • A reverse mortgage usually has to be repaid when the borrower moves for 12 or more consecutive months, such as to a retirement home or other care facility.
  • If the borrower is married, his spouse can stay in the accommodation under certain conditions.
  • Non-spouse co-borrowers can also stay in the accommodation.
  • A reverse mortgage can affect a person’s eligibility for Medicaid benefits to pay for long-term care.

When the reverse mortgage borrower is single

A single person with a reverse mortgage living alone usually has to repay the loan if they have not lived in the house as their primary residence for more than 12 consecutive months. So, for example, someone who enters a rehabilitation center for a few months, but then returns home, can keep their reverse mortgage. If they move into a settlement and stay beyond that 12 month period, however, they are considered to have moved permanently and must repay the loan.

The rules are different if the borrower is single and has a co-borrower and/or if the borrower is married.

When there is a co-borrower on the mortgage

A reverse mortgage can have more than one borrower. Co-borrowers can be spouses (see next section) or someone else.

Regardless of their relationship, if there is a co-borrower on the mortgage, that person can stay in the home and continue to collect the mortgage proceeds after their co-borrower dies or moves into a care facility for 12 months or more. The mortgage will then become payable only after the death or departure of the second borrower.

When the reverse mortgage borrower is married

For the purposes of reverse mortgages, spouses fall into three categories:

Spouse co-borrower—If the spouse is listed as a co-borrower on the loan, they can stay in the home and continue to collect reverse mortgage payments. The same rules apply if a co-borrower is not the spouse of the other borrower.
Eligible non-borrowing spouse— If a spouse was under age 62 when their spouse took out the reverse mortgage, they were not eligible to be a co-borrower on the loan. However, for reverse mortgages issued after August 4, 2014, they may be listed in the loan documents as a non-borrowing spouse. If they have been and meet certain other criteria, they can stay in the unit after the other spouse has moved out for more than 12 months.

Other requirements are that:

  • The loan cannot be in default for reasons such as non-payment of property taxes or insurance premiums.
  • The non-borrowing spouse must have been legally married to the borrowing spouse at the time of closing the mortgage and still be legally married to them.
  • In cases where the law prohibited a couple from marrying because of their gender at the time of closing the mortgage, the non-borrowing partner may be eligible if they were in a “committed relationship” with the borrower at the time. closing of the mortgage and that he subsequently married legally. (“before the death of the borrower” says the language) and “remains married to the HECM borrower, in situations where the HECM borrower has resided in a healthcare facility for more than twelve consecutive months”.
  • The non-borrowing spouse must have lived in the property at the time of closing the mortgage and it must still be their principal residence.

Note that unlike co-borrowers, non-borrowing spouses cannot continue to receive reverse mortgage payments.

Ineligible non-borrowing spouse—Spouses who do not meet the criteria to be considered “eligible” cannot stay in the home if their spouse moves out for more than 12 months, unless they are able to work out an arrangement with the lender. At that point, the reverse mortgage matures. Other family members or anyone else who might live in the house must also move in this situation or else buy the house and pay off the mortgage.

Reverse Mortgages and Medicaid Eligibility

Many Americans use Medicaid to pay for nursing home costs or other long-term care expenses. (Medicare only provides coverage in very limited circumstances.)

Medicaid has strict income and asset limits, which may vary by state. Reverse mortgage payments are not considered income, although they may be considered assets if not spent.

A Medicaid applicant’s home is an exempt (or “uncountable”) asset up to certain limits (usually $636,000 or $955,000 in equity, depending on the state). If a single person with a reverse mortgage enters a care facility for 12 or more consecutive months, they (or their heirs) will have to sell the home and pay off the reverse mortgage. If there is any money left over, it would become a non-exempt asset and be considered for Medicaid eligibility. They would then have to spend that money to pay for their own care in order to become eligible again.

In the case of a married couple, the person who stays at home is called the “community spouse”. The community spouse can stay in the home for the rest of their life, although the state can place a lien there and attempt to recover expenses paid by Medicaid for the care of the institutionalized spouse after the death of the community spouse .

Where can you get a reverse mortgage?

Home equity conversion mortgages (HECMs), the most common type, are only available from lenders approved by the Federal Housing Administration (FHA). Some lenders also offer their own proprietary reverse mortgages.

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

Yes, you can use a reverse mortgage for any purpose you wish. You can also use it to pay for home care or home modifications that might allow a person to stay at home and not go to a care facility (or postpone until the day it becomes necessary).

What is a Medicaid expense?

A Medicaid expense generally refers to spending enough of your non-exempt assets to qualify for Medicaid benefits. There are strict rules about what you can spend money on, and states have a look-back period, usually going back 60 months, during which you cannot have assigned assets or sold them to a price below their market value.

The essential

A reverse mortgage usually has to be paid off when the last borrower dies, sells the house, or moves out for 12 or more consecutive months. This rule can present a complication when a borrower moves into a care facility and cannot return within 12 months. However, all co-borrowers can stay in the house without triggering the loan maturity. And if the borrower had a non-borrowing spouse living in the house, that person may be able to stay in the house if they meet certain criteria.

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