Two New Provisions Make Reverse Mortgages More Desirable

Q. My husband, Bob, and I have lived in Northern Virginia for nearly fifty years and we have no plans of moving. We are original owners of our home and our mortgage has been paid off for nearly two decades now. Our children all live within a mile of our home, so we are hoping to stay put for as long as possible. With the price of homes in our area right now, we currently have $800,000 in equity in our home!

Our need for money to retire comfortably and the fact that our children are all in a good financial situation is driving us to learn more about reverse mortgages as a way to age in place comfortably. I heard that there are some new provisions that make reverse mortgages a better option than it had been in the past. Can you tell me more about this? Thanks so much!

A. Reverse mortgages are becoming increasingly popular and can be a very important part of a well-structured retirement plan. For those who are not familiar with the concept, a reverse mortgage (or, as we will refer to it, a HECM loan – which stands for Home Equity Conversion Mortgage) is a loan for people aged 62 and older who want to convert their home equity into cash with no monthly mortgage payments.

The reason for the rise in popularity of HECM loans is due to two things. One reason is that a lump sum, monthly payment, or credit is provided to the homeowner, significantly improving their immediate financial situation. Also, with HECM loans, your home remains yours and you can live there until the day you die, providing you keep current with taxes, maintenance, and insurance. A HECM loan does not require repayment until the homeowner(s) no longer reside in the residence or the last surviving borrower passes away or does not comply with the loan obligations.

A HECM loan is obviously not right for everyone, but these types of loans have evolved into something that is much better now than it has been in the past.

New Provisions Introduced for HECM Loans

If your home equity is your biggest (or only) asset, you’re short on cash, and you don’t have any other viable way to get the money you need for the expenses of daily life, you may need to take out a HECM loan to be able to age in place. Recently, two new provisions have made HECM loans a better option for retirees.

The Federal Housing Administration (FHA) recently announced new amendments to non-borrowing spouse (NBS) provisions for the HECM program, implementing additional protections for such spouses involved in a government-sponsored reverse mortgage. This is according to the publication of Mortgagee Letter (ML) 2021-11.

The new ML does the following:

It expands criteria which will begin a deferral period for HECMs with case numbers assigned on or after August 4, 2014;
It expands assignment criteria for Mortgagee Optional Election (MOE) Assignments for HECMs with case numbers assigned before August 4, 2014;
It eliminates the requirement for an Eligible Non-Borrowing Spouse to establish marketable title or other legal right to remain in the property following the death of the HECM borrower.
It will include HECMs eligible to be called due and payable under the terms of the original mortgage, due to the property no longer being considered the principal residence of a borrower due to the borrower’s residence in a health care institution for more than 12 consecutive months.
It expands the definition of someone who can be called an “eligible non-borrowing spouse” (NBS) to include “the spouse of a HECM borrower where the HECM loan was assigned an FHA case number prior to August 4, 2014,” as well as several additional new criteria.
o Such newly-eligible NBS can be spouses who were legally married to the borrower either at the time of the borrower’s death or during the borrower’s relocation into a healthcare facility.
o Additionally, an eligible NBS can now be someone who “has occupied, and continues to occupy, the property securing the HECM as his or her principal residence. The deferral period “shall cease immediately” once the NBS stops occupying the secured property as his or her primary residence, or fails to meet the amended eligibility requirements as outlined in the new ML.

Why Are these Additional Provisions Being Instituted?

In its informational notice announcing the publication of the new ML, FHA explains that these additional protections are being instituted to help secure the long-term viability and stability of the HECM program.

“These program changes should improve the efficiency and long-term viability of the program…These changes also streamline processes and reduce administrative costs for both mortgagees and HUD… The program changes also have a positive impact on HECM borrowers since now all HECM NBS can take advantage of the expanded deferral period and MOE Assignment, which provides non-borrowing spouses with increased options to remain in their homes without having to repay the HECM loan or face foreclosure,” FHA said in its informational notice.

The agency details that while HECM mortgagees can begin using the new procedures immediately for all new HECMs, those electing not to do so will have to have the new procedures implemented by September 3, 2021, or 120 days after the publication of the new ML.

Is a Reverse Mortgage Right for You?

Your home is typically one of your biggest investments, and choosing to release the equity you have stored is a complex, major decision. Typically, seniors choose a reverse mortgage because:

It eliminates monthly mortgage payments;
The proceeds from a reverse mortgage are tax-free;
You can use the proceeds for anything you want, but most people will use the proceeds to hire caregivers to allow them to age in place and to make any necessary home renovations to allow you to more easily age in place, such as wheelchair ramps, first floor bedrooms, and walk-in bathtubs);
It provides a financial safety net.

HECM Loans and Medicaid Eligibility

Here’s another advantage of a HECM loan: If you should need nursing home care in the future, as a general rule, a reverse mortgage does not affect Medicaid eligibility. Keeping money in a reverse mortgage line of credit in most states does NOT count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource. However, transferring money from a 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 that could make you lose your Medicaid eligibility.

For more details on HECM Loans, please read my article on the subject here.

Planning for Long-Term Care

If you or your loved one is facing the possible need for long-term care and/or thinking about getting a reverse mortgage, you should get an opinion from an experienced elder law attorney who is also experienced with reverse mortgages, such as myself, before moving forward. Be sure to also complete your estate planning, incapacity planning, and long-term care planning for peace of mind and to ensure that your wishes are known and followed should something unexpected occur. Please call us to make an appointment for a no-cost initial consultation:

Fairfax Elder Law: 703-691-1888
Fredericksburg Elder Law: 540-479-1435
Rockville Elder Law: 301-519-8041
DC Elder Law: 202-587-2797
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