Imagine receiving a foreclosure notice after your spouse dies, even though you are current on all of the payments. That’s just what happened to some widows and widowers who took out a reverse mortgage while their spouses were still alive.
Reverse mortgages allow individuals or couples over the age of 62 to receive cash payments based on the equity they have built on their home. The loan does not come due until all of the participants in the reverse mortgage have left the property—so what’s the problem?
Since the age of the individuals is used to calculate the withdrawal amount, many couples were advised to take the younger spouse off the title—so they could get a higher payment. Then, once the older spouse dies, the surviving spouse receives a foreclosure notice because their name is not on the mortgage.
A recent court ruling forced HUD to update its rules in order to avoid this problem. Starting August 4, a reverse mortgage must list both spouses, so the survivor won’t have to worry about facing foreclosure.
But what can you do if you already have a reverse mortgage?
Here’s how to protect yourself:
- Declare you are married—on the HUD application, confirm it with the lender when you close and every year the mortgage is in effect via a HUD form.
- Remain married to your spouse.
- Make sure the non-borrowing spouse appears in the mortgage documents—if one spouse is not, there’s more on that below.
- Remain current with property taxes and insurance coverage.
- Continue to live in the home.
- When your spouse dies, you must establish legal ownership within 90 days.
The Bad News
The new rule dictates the amount of money that can be borrowed will be based on the age of the younger spouse, whether he or she is on the mortgage or not. If one person is much younger than 62, the payment will be substantially lower.
The new rules are not retroactive, however. If you already have a reverse mortgage—and you are not named in the documents—check with a lawyer or with your lender to find out how you can avoid foreclosure.
HUD is looking at ways to cover spouses who are not named in the mortgage and will allow extensions in some cases.
Does Getting a Reverse Mortgage Make Sense?
It all depends on your situation.
If you need cash for expenses—and you have equity in your home—a reverse mortgage may be a good option. There are several ways to receive the money: you can get a lump sum payment, a line of credit or monthly payments.
As with any other mortgage or loan, though, there are associated costs, so explore all your options before you apply.
The amount of money you can obtain is restricted by your age and the amount of equity in the home. You need to keep up with property taxes, insurance and maintenance, and once all of the homeowners have left the home, the lender must be repaid.
If the family does not buy the home, the lender will sell the home in order to settle the debt.
The Good News
There is a required counseling program that will help you sort through all of these rules so you can make an informed decision. Check out HUD’s Reverse Mortgage FAQs or Mortgagee Letter 2014-07 for more information about the new changes.