How To Protect a Non-Borrowing Spouse in a Reverse Mortgage
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One of the most common problems with reverse mortgages has been foreclosures on the non-borrowing spouse (NBS) after the borrower leaves the home. This article focuses on how to protect a spouse that’s not on a reverse mortgage.
Written by Attorney John Coble.
Updated October 12, 2021
Reverse mortgage loans can be an excellent way for older homeowners to supplement their retirement income. But there are also some pitfalls, including foreclosure. Since you don’t make mortgage payments on a reverse mortgage, many people aren’t aware that lenders can still foreclose. One of the most common problems with reverse mortgages has been foreclosures on the non-borrowing spouse (NBS) after the borrower leaves the home. This article focuses on how to protect a spouse that’s not on a reverse mortgage.
What’s a Reverse Mortgage?
In a traditional mortgage, you take out money from a lender for a home and repay them each month. The more you repay, the more equity you build in your home. With a reverse mortgage, you essentially cash in on that equity. This is why it's best suited for older adults who’ve owned their homes for many years. The reverse mortgage servicer disperses periodic payments or a lump-sum payment to the homeowner rather than the other way around.
Given this, how can you be at risk of foreclosure? There are several reasons your reverse mortgage servicer could foreclose, including:
You didn’t pay property charges like your property taxes, homeowner's insurance premiums, or homeowners association (HOA) dues.
You, the borrower, fail to occupy the home as your principal residence for 12 consecutive months.
You pass away or move to another home, including a nursing home or assisted living facility.
2 Types of Reverse Mortgages
The main types of reverse mortgages are proprietary reverse mortgages and Home Equity Conversion Mortgages (HECM). HECMs are guaranteed by the Federal Housing Administration (FHA), so there’s less risk of loss for the lender. Proprietary reverse mortgages don’t have such a guarantee. Since the FHA guarantees HECM loans, the majority of reverse mortgage loans are HECMs.The U.S. Department of Housing and Urban Development (HUD) regulates the HECM program.
To qualify for an HECM::
You must be at least 62 years old;
You can’t have more than a small mortgage balance;
You must occupy the home as your principal residence;
You can’t be delinquent on any federal debt; and
You must receive HUD-approved housing counseling.
Why Wouldn’t My Spouse Be on the Reverse Mortgage?
You must be 62 years old to qualify for an HECM reverse mortgage. Since spouses are often different ages, it’s relatively common to have the first spouse who reaches age 62 apply for the reverse mortgage. If the other spouse is younger than 62 and can’t apply, they become a non-borrowing spouse. The reverse mortgage also could’ve originated before the marriage.
Not being on the mortgage leaves the non-borrowing spouse in a vulnerable position, especially if the borrowing spouse leaves the home. This is very common because senior citizens will eventually pass away, and many move to an assisted living facility at some point. If the other spouse is not a reverse mortgage borrower, what happens? The answer depends on the law in effect on the day the reverse mortgage originated.
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Non-Borrowing Spouses on Reverse Mortgages Originated Before August 4, 2014
HUD manages these requirements. If the reverse mortgage was closed before August 4, 2014, and the borrowing spouse leaves the residence, these rules apply:
The lender may foreclose and remove the non-borrowing spouse, or
The surviving non-borrowing spouse may pay off the loan, or
The lender may allow the non-borrowing spouse to remain in the home under a Mortgagee Optional Election (MOE) assignment.
To qualify for a MOE assignment, the non-borrowing spouse must:
Have been married or in a similar committed relationship barred by law from marriage at the time the loan documents were signed, up until the borrower’s death;
Have lived in the home as their principal residence since the beginning of the loan and continue to live in the home;
Provide their Social Security number or Taxpayer Identification Number;
Agree they’ll no longer receive payments from the reverse mortgage loan;
Continue to make the maintenance payments on the home; and
Agree they won’t cause the reverse mortgage lender to call the loan as due and payable for any reason.
Non-Borrowing Spouses on Reverse Mortgages Originated on or After August 4, 2014
For loans taken out on or after August 4, 2014, the rules are more favorable for non-borrowing spouses when borrowing spouses leave the home. These HUD rules are:
The non-borrowing spouse is named in the loan documents as a non-borrowing spouse.
The loan isn't in default for any other reason than the borrower's death.
The borrower and non-borrowing spouse were either legally married at the time the HECM was closed and remained married until the borrower's death or were in a relationship like marriage at the time of the loan closing but were legally prohibited from being married due to the gender of the spouses and were later married and remained married until the borrower's death.
The non-borrower lived at the property at the time of the closing and continues to live in the property as their primary residence.
The non-borrowing spouse, within 90 days after the death of the borrower, obtains legal rights to remain in the property for the remainder of the non-borrowing spouse's life.
If these HUD requirements are met, the NBS is eligible for a deferral period to stay in the home until the reverse mortgage becomes due because they've violated the terms, moved, or passed away.
Other Problems for Non-Borrowing Spouses
If the NBS fails to comply with any of HUD’s requirements, they may face foreclosure. Worse, if the money from the mortgage company was coming in periodic payments, the NBS isn’t entitled to receive those payments under the old or new regulations.
The death of the borrower isn't the only concern for the non-borrowing spouse. Until recently, if the borrowing spouse moved to an assisted living facility for more than 12 consecutive months, the home could be foreclosed and an eligible non-borrowing spouse could be evicted. That's even though the lender couldn’t foreclose on the home if the borrowing spouse died. Effective September 3, 2021, there are new protections so a reverse mortgage lender can no longer foreclose in this situation. The eligible NBS can stay in the house.
If you’re considering a reverse mortgage and your spouse is younger than you, it may be a good idea to wait until you’ve both reached the age of 62. That’s because anyone younger than 62 can’t apply for a reverse mortgage. If you marry after taking out a reverse mortgage, it’s important that you and your spouse discuss what to do if you need to leave the home, putting them at risk of foreclosure.
Though new protections have been enacted for eligible non-borrowing spouses, there are still risks if you leave the home. As part of the reverse mortgage approval, you’ll have to meet with a housing counselor. Attend the meeting with your non-borrowing spouse, and take that opportunity to ask about how you can help protect them.