Key Changes Tighten Reverse Mortgage Eligibility

Q: My mother, Sally, 62, owns a home in Fairfax that is valued at $500,000 and the amount owed on her mortgage is still $300,000. When my mother retires in 3 years, the monthly mortgage payment will be unaffordable for her, but she would still like to remain in her home.  She is considering refinancing her current conventional mortgage to turn it into a reverse mortgage, but I heard that some changes have recently gone into effect that may make reverse mortgages harder to get. Is this true?  Also, my grandpa lost his house when he had to go into a nursing home several years ago due to Alzheimer’s.  I understand now (from reading your website) that we could have protected grandpa’s house had we come to you.  But now I’m concerned about my mom maybe getting Alzheimer’s and needing nursing home care.  Would a reverse mortgage cause a problem with getting her eligible for Medicaid?

A. Many homeowners understandably want to remain in their homes as they age because they want to remain independent and because they have spent many years making their home everything they wanted it to be. Reverse mortgages have assisted many senior homeowners over the years to stay in their homes when their financial position changed.

A reverse mortgage is a loan for people age 62 or older. It 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, and the homeowner is still responsible for property taxes and insurance. Reverse mortgages were initially developed as a tool to assist individuals to remain in their homes and communities as they grow older, by allowing homeowners to tap their equity without selling their homes. As you mentioned, however, the rules about reverse mortgages recently changed, making them harder to obtain.

In August of 2013, the President signed HR 2167 – “The Reverse Mortgage Stabilization Act of 2013” – giving the Federal Housing Administration (FHA) the authority to make necessary changes to the reverse mortgage program. According to the United States Department of Housing and Urban Development (HUD), the changes “reduce their risk and make the program easier for seniors to use responsibly.”  For the homeowner, the changes will make it harder to qualify for a reverse mortgage, but will provide additional protections.

Until now, getting a reverse mortgage loan required no credit history and no minimum income requirement.  Due to problems with homeowners failing to maintain their property tax and home insurance payments, starting on January 13, 2014, the FHA began requiring lenders to verify that homeowners have the ability to pay their taxes and insurance and that their credit history demonstrates a commitment to paying obligations.

To qualify for a reverse mortgage, lenders now must analyze all income sources — including pensions, Social Security, IRAs and 401(k) plans — as well as credit history. They also look closely at how much money is left over after paying typical living expenses.

If a lender determines that you are not be able to keep up with property taxes and hazard insurance payments, they are now authorized to set-aside a certain amount of funds from your loan to pay future charges. The amount of the set-aside is based on the life expectancy of the youngest borrower. If set-aside funds run out, you must continue paying property charges using whatever funds are at your disposal.

If a lender determines that you have sufficient income left over, then you don’t have to worry about having any funds set-aside to pay for future tax and insurance payments.

These changes, along with the reduced benefits  adopted in September of 2013, mean that many seniors will not qualify for a reverse mortgage to make their homes affordable.

Why the new rules? Some seniors who obtained reverse mortgages with rather harsh terms found they were unable to either live off the loan for long or pay it back entirely. The FHA’s changes to its reverse mortgage program sets out to encourage homeowners to tap their home’s equity slowly and steadily.  “What regulators are trying to do is shift behavior so that people are more thoughtful and methodical about how they draw the money,” says Peter H. Bell, president of the National Reverse Mortgage Lenders Association. “The changes are intended to put the program back on track and encourage people to take what they need and no more.”

You also asked if a reverse mortgage might affect Medicaid eligibility for your mother.  The answer is no. 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, which it would be for your mother so long as she is living in the home and receiving home-based Medicaid services.  However, transferring 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 that would make her lose her 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 Certified Elder Law Attorney, such as myself. To make an appointment for a consultation, please call the Fairfax and Frederickburg Medicaid Asset Protection Law Firm of Evan H. Farr, P.C. at 703-691-1888 in Fairfax or 540-479-1435 in Fredericksburg.

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.