Reverse Mortgage and Gray Divorce: Questions & Answers

If you’re 62 or older and going through a divorce, a reverse mortgage may provide you with a high degree of financial flexibility to help you rebuild your life.

Here is everything you need to know to decide whether a reverse mortgage during divorce is right for you:

What is a reverse mortgage?

A reverse mortgage is a loan for homeowners 62 and older who have a large amount of home equity.

A reverse mortgage is also called a Home Equity Conversion Mortgage (HECM) and you might see this abbreviation as you research or go through the actual process.

It is different from a mortgage loan you take out when you buy a home because a reverse mortgage does not require the borrower to make any loan payments.  This can be ideal for someone who is older than 62 and would not otherwise qualify for a mortgage if they are retired or prefers not to have a mortgage payment that late in life.

The full loan balance is due and payable when the borrower dies, sells, the home or permanently moves away.

Borrowers can elect to take the reverse mortgage in a single lump sum, as a line of credit or by receiving fixed monthly payments.

A reverse mortgage loan can provide essential cash for seniors who have a net worth that is mostly tied to the value of the home.  Until a triggered event that causes the loan to mature, the borrower gets to keep the title to the home.

When the homeowner moves or dies, proceeds from the home’s sale repay the reverse mortgage’s principal, interest, and fees. Any amount beyond what was borrowed goes to the homeowner or the homeowner’s estate.

It can be used to help fund a settlement agreement, providing housing solutions for one or both sides after a divorce, or free up funds to relieve potential financial challenges that may come after divorce.

Key Point:  In essence, with a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner.

By law, lenders must structure a reverse mortgage transaction so the loan amount doesn’t exceed the home’s value.  If the home’s value falls due to market conditions, or for other reasons, then the borrower or their estate isn’t responsible for paying the difference if the loan balance becomes larger than the home’s value.

The percentage varies by lender, but typically you’ll need at least 50% equity based on your home’s current value to qualify for a reverse mortgage.

Getting your money from a reverse mortgage

There are several ways you can receive proceeds from a reverse mortgage:

  • Lump-sum. You get funds all at once when the loan closes.  It is the only option for a loan with a fixed interest rate.  All other types of distribution have adjustable interest rates.
  • Equal monthly payments (annuity). As long as at least one borrower lives in the home, the lender will make steady payments to the borrower.
  • Term payments.  Borrowers get equal monthly payments over a set duration of time.
  • Line of credit.  You borrow funds as needed and only pay interest on what you borrow.
  • Equal monthly payments plus a line of credit.  This hybrid approach provides steady monthly payments plus a line of credit if a borrower needs additional funds at any point.
  • Term payments plus a line of credit.  Another hybrid approach that provides steady monthly payments for a defined length of time plus a line of credit if a borrower needs additional funds at any point.

Why would someone use a reverse mortgage in a divorce?

Grey divorce (marital splits between couples over 50) has risen dramatically in recent years.

That has put more Americans at financial risk as their lives have been upended later in life.

A reverse mortgage is a practical solution for a suddenly single senior who has been used to sharing an income with another person for a long time.

A reverse mortgage can provide flexibility to create a good framework for a workable settlement.  It makes sense whether one spouse wants to stay in the family home, or both spouses want to sell the home and one or both decide to apply proceeds to buy another home.

This creates housing stability post-divorce along with no monthly mortgage payments.  In a scenario when selling and buying are combined into a single transaction, closing costs and home-buying fees are often less because the transaction is streamlined.

Reverse Mortgage Example

Richard and Teresa are in their late 60s and have agreed to divorce.  They currently have a house valued at $800,000 that is fully paid off.  Richard wants to continue to live in the house, but Teresa wants to buy and move into a new home of her own.

Teresa wants Richard to sell their home so she can get enough cash out of the sale to finance the purchase of another home.

Instead of selling the home outright, a reverse mortgage would let Richard continue to live in their current home and provide Teresa with as much as $400,000 to be used to buy a place of her own.

Richard does a cash-out refinance and takes $400,000 out for Teresa.  Teresa uses the $400,000 to do a reverse mortgage for purchase on a new home.

Both end up owning homes, and neither have monthly mortgage payments.  Both will still need to pay taxes and insurance to maintain their separate homes.

Who is eligible for a reverse mortgage?

To qualify for a reverse mortgage loan, you will need to meet several eligibility requirements, including:

  • You are 62 years or older
  • Your home is your principal residence
  • Your home must be a single-family residence, HUD-approved condo project, manufactured house that meets FHA requirements, or a two- to four-unit building where you occupy one unit
  • You own your home outright or have a low enough mortgage balance that you can pay it off with the loan proceeds
  • You have the financial resources to pay property taxes, homeowners insurance, repairs and maintenance, and any homeowners association fees.
  • You are not delinquent on any federal debt
  • You meet with a federally approved financial counselor who will explain the reverse loan process, requirements, costs and alternatives to you
  • Your loan amount is based on the age of the youngest borrower (or eligible nonborrowing spouse), your home’s value, and the interest rate.
  • The maximum amount you can borrow is $679,650. But even if your home is worth $679,650, you won’t necessarily qualify for the full amount.

How does divorce impact reverse mortgage decisions?

So that they are clear on the implications of entering into a reverse mortgage, many people seek counseling before entering into a loan.  This commonly happens whether or not divorce is part of the equation.

In fact, counseling is a requirement of most reverse mortgage lenders prior to closing.

Because grey divorce rates have risen dramatically in recent years, more and more reverse mortgage counselors are seeing people who qualify for a reverse mortgage who are also going through a divorce.

Divorces have a tendency to complicate the reverse mortgage process.  If one person requests counseling, the ex-spouse or soon-to-be-ex will also need to be counseled, even if they’re not on the title or deed to the home.

When the proceeds from the reverse mortgage and included as part of the final settlement, couples are more willing to go through counseling to complete both the mortgage and divorce transactions.

However, many people are surprised to learn this rule is in effect and sometimes choose to wait until a divorce is final before going through a reverse mortgage transaction.  In this case, they can go through counseling alone.

Another way divorce impacts reverse mortgages is that loan originators must sometimes act as mediators to get a deal done.  Instead of working together to get a deal done, couples may lack the level of trust needed to work through the details in a civil and orderly fashion.  It definitely adds a layer of complexity to the loan process.

Also, divorce typically impacts women more than men, and adding a reverse mortgage to the equation can take some time to sort out.  Women traditionally have had lower incomes and therefore need more financial flexibility to be able to stay in their homes as they grow older.  Women who were caregivers and homemakers while their husbands were the breadwinners can find themselves in a financial bind later in life.

As a result, women tend to need the benefits of a reverse mortgage more than men.  Cutting down housing expenses later in life is critical.

Reverse mortgage funds reduce or eliminate a monthly mortgage payment or can help supplement income that can make the difference in a woman’s quality of life.

What is the difference between a reverse mortgage and a standard mortgage?

With a standard mortgage (sometimes referred to as a forward mortgage), you take out a loan and make monthly payments until the loan is paid off.

A reverse mortgage is completely the opposite.

When you take out a reverse mortgage, you are not required to make any loan payments.  The full loan balance only becomes due and payable when a borrower dies, sells the home, or permanently moves away.

Important:  Both types of mortgages require that borrowers continue to pay property taxes and homeowners insurance, as well as perform basic home repair and maintenance.  

The key difference with property repairs is that with a traditional mortgage, home repairs are not a requirement but make sense to protect your investment. However, with a reverse mortgage, a lender may foreclose on the property if the home is not maintained satisfactorily.

Financial assessments are required for both types of loans, but how those assessments are conducted is different.  With a reverse mortgage, if a qualified borrower doesn’t have sufficient capacity to cover the financial responsibilities of the loan, some of the loan proceeds must be set aside to ensure these obligations can be met.  With a traditional loan, if you don’t qualify, you are denied the loan.

Can I buy a house with a reverse mortgage after a divorce?

Yes.  This is particularly attractive for a person who is downsizing after divorce and meets loan requirements set forth by a lender.

In some cases, you can execute a reverse mortgage purchase loan that allows you to purchase a new home while taking out a reverse mortgage in a single transaction.  This facilitates the transition more efficiently.

If you get a divorce and you already have a reverse mortgage with your spouse, you’ll have to notify your loan servicer by submitting your divorce decree to them

To get your own reverse mortgage after the divorce you will need to supply your divorce decree that has been finalized with the court.  The agreement must specifically award the property to your ex-spouse and name them as the individual solely responsible for that reverse mortgage.

Unless you have this documentation, you cannot get a new reverse mortgage of your own.

What is the first thing someone should do when considering a reverse mortgage in a divorce?

Talk to an expert.  Go through reverse mortgage counseling.  Ask a lot of questions.  Be very clear about what you’re getting into.

Get a referral to the best and most experienced reverse mortgage specialist you can find.  This type of transaction can be complicated, and you can’t afford to stumble while trying to rebuild your life.

Do I pay interest on a reverse mortgage?

Yes, but with a catch.

Reverse mortgage interest payments on your loan are deferred to the end of the life of the loan.  That means they are not paid out-of-pocket or upfront, at a time when you’re trying to preserve financial resources.

Interest rates play a big part in how much you can qualify for and are added to the loan balance every month.  You should get a statement telling you how much interest has accrued.

Keep in mind, the loan and the interest becomes due and payable when the borrower dies, the home is sold, or the borrower moves out of the home.

Key Point:  Payment can also be triggered if the loan goes into default because a borrower did not pay property taxes, homeowners insurance, or did not comply with other loan terms.

Be sure you understand how reverse mortgage rates are calculated and whether you will get a loan with a fixed rate or a variable rate.  About two-thirds of all reverse mortgage loans are fixed-rate loans.  If you choose a variable rate loan, make sure you understand the factors and the frequency that determine how the loan interest rate can change over time.

Can I get a reverse mortgage without any income?

Yes.  You don’t need to have an income or a good credit score to qualify because payments aren’t made until the loan matures through a qualifying event, such as the borrower’s death or moving out and selling the home.

You will need to show means to pay property taxes, homeowners insurance, the ability to maintain the property.

What are the fees and costs of obtaining a reverse mortgage?

If you have already gone through the traditional mortgage experience, then you already have a pretty good idea of what kinds of costs you’ll be faced with in a reverse mortgage.

Generally, fees and costs are about the same for both types of loans, and can include:

  • Appraisals
  • Credit Report
  • Counseling Fee
  • County/Mortgage Registration Tax
  • Courier Fee
  • Document Preparation
  • Escrow/Settlement/Closing
  • Endorsements
  • Flood Certification
  • Name Search
  • Pest Inspection
  • Recording Fees
  • Special Assessment Search
  • Survey Fees
  • Title Exam
  • Title Insurance
  • Title Search

Your lender should be able to supply you with exact costs for each of these items so you’ll know what to expect as you move through your reverse mortgage process.

What happens to a reverse mortgage when the homeowner dies?

A reverse mortgage must be paid back when the borrower dies or moves out of the home.

There are several ways the loan can be satisfied.

Sell the home to pay off the reverse loan balance.  Borrowers or their heirs pay off the reverse mortgage by selling the house.  Any remaining amount over and above the loan amount is kept by the borrower or the heirs.

Sell the house for less than the mortgage balance.  When a reverse mortgage borrower is underwater (they owe more than the house is worth), an heir can satisfy their loan by selling the house for 95% of its appraised value.  The difference is used to pay off the reverse mortgage.  The FHA does not allow lenders to come after the borrower or their heirs for the difference.

Have an heir take out a new mortgage after you die.  If an heir wants to keep the house, they can pay off the reverse mortgage loan or take out a new loan to cover the balance.  Heirs need to move quickly after a borrower’s death.  The FHA only allows six months for an estate to pay off the reverse mortgage loan.

Provide a deed in lieu of foreclosure.  There are cases where mortgage borrowers die owing more on a reverse mortgage that the value of the home.  When heirs inherit the house, they may decide the quickest and easiest path is to provide the lender with a deed in lieu of foreclosure, saving them going through the foreclosure process.  This does not hurt the heir’s credit score.

Are there any risks of using a reverse mortgage after divorce?

Just like with any other financial obligation, there are some risks associated with a reverse mortgage.

Your home can still be at risk if you don’t maintain related costs such as taxes, homeowners insurance, repairs/maintenance, and homeowners’ association dues.  The loan can default if you don’t meet those obligations.

There are stipulations about which circumstances trigger an immediate repayment or foreclosure on the home. One of these is how many days or months the property can sit vacant before the lender can call the loan.  Be sure you understand what those limitations are.  You could be in default of the loan if you have a medical situation that requires an extended stay away from your home.

If the market turns cold, you could be wiping out equity by adding interest costs to your loan when it is depreciating in value.

Important:  Every lender offers slightly different terms for a reverse mortgage loan.  These loans can be complex and difficult to understand with hidden downsides that aren’t readily apparent. Counseling is usually required before closing – but you should always protect yourself by having a lawyer or trusted advisor review the contract. 

In cases where a reverse mortgage lender is paid a commission on executing the loan, they can push you into making a decision that’s in their best interests and not yours.

Also, if you get a large sum of money after a divorce, you may succumb to your own temptations and fritter the money away foolishly, leaving you with little to show at the end of your life.

Some government program assistance is based on your liquid assets (i.e, Medicaid).  If you have reverse mortgage assets, your eligibility could be impacted by some of these programs.

Finally, you may also be exposed to high loan origination and servicing fees that may be buried in the loan documents.

What are the top 3 benefits of a reverse mortgage in a divorce?

#1 – Financial flexibility.

With a reverse mortgage, you can put a lot of cash in your pocket that you can use to buy another home, use proceeds to facilitate a smoother divorce settlement process.

#2 – Quality of life stability.

If you execute a reverse mortgage in a divorce, it will enable you to maintain continuity and stability in your life at a time when other factors could be taking an emotional toll on you.  Also, if you choose to stay in your home, it’s one less major issue you have to deal with until you can decide what changes you want to make in your life.

#3 – Maximizing your estate for your heirs.

Instead of selling a home, cashing in, and splitting the proceeds, with a reverse mortgage, you can keep the home.  This means you’ll continue to enjoy the appreciated value which could be a considerable amount in a rising market.  You’re also protected from too much of a downside even when the reverse loan amount exceeds what the home is worth at a later date.