This is a fictional scenario based on real-life situations I’ve seen: Sam and Sara have been married for a number of years, and have made the difficult decision to get a divorce. They are both in their 70s and jointly own their house with a value of $600,000.
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Sara wants to stay in the family home; Sam is agreeable but wants to be able to buy a small condominium. However, there is a $200,000 mortgage on the family home, and the current lender is not willing to release Sam from that obligation unless it is paid off in full. The lender’s position is that Sam and Sara both signed the loan documents, and this cannot be changed.
Sara does not have the financial ability to refinance the existing loan, and Sam is concerned that if he puts his name on the refinance for Sara, he will not be able to buy the other property.
This is a very common problem throughout the country. With the divorce rate increasing among seniors (the “silver” divorce), too many couples seeking a divorce either have to sell the family home or the spouse who will not remain in the property is unable to buy something else.
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One possible solution: Use a reverse mortgage for both transactions, typically referred to as HECM or Home Equity Conversion Mortgage. The minimum age to obtain such a loan is 62. Lenders use the age of the youngest borrower since their life expectancy is theoretically longer, so both owners must be at least 62 years old. The down payment is calculated using the age of the borrower, but the price of the house and current mortgage interest rates are plugged into the calculation. From talking with lenders, the older the borrower, the less down payment is required. If you are interested in going this route, a reverse mortgage lender will be able to assist you in with all of the details and the financials.
Sara opts for a reverse mortgage. Using a calculator such as the one that can be found on the web (www.
reversemortgage.org/about/reverse-mortgage calculator) it appears that Sara can get approximately $286,000 from an authorized lender. The $200,000 mortgage will be paid off, and Sara will be able to live in the house without having to make any more monthly mortgage payments. She will, however, have to pay the real estate tax, maintain proper insurance coverage as well as keep the property in good condition.
In our example, in addition to having the current mortgage paid off, Sara can also get a lump sum of $86,000. In consideration for Sam agreeing to transfer his interest to Sara, she can agree to give him those funds, which he can then use as a down payment on the condo he wants to buy. Sam would be using what is known as a Home Equity Conversion Mortgage for Purchase, HECM for Purchase or simply H4P.
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Once again, every situation is different, but in general — and depending on Sam’s age at the time he makes the loan application — he will be able to get a reverse mortgage loan of between 47 and 52 percent of the purchase price of the new property. The older you are, the more money you are eligible to get.
There are a few requirements: You must live in the new property; it must be your principal residence. You must go through consumer counseling; the lender — and the government — want to make sure you fully understand what you are pursuing. And you must prove you are financially able to pay the real estate taxes, insurance, general maintenance and upkeep and any applicable community association dues.
If Sam and Sara both qualify for their HECM, Sara will stay in the family home, Sam will have his own condo, and neither will be obligated to pay any mortgage so long as they continue to reside in their respective properties.
A reverse mortgage — or in this case a double reverse — is not for everyone. While it does solve a major problem many divorcing couples have, you must do your homework as soon as you have reached agreement to divorce. Sam and Sara must talk to their financial counselor and to their respective attorneys.
There is a lot of information online about the HECM. Do not, however, rely on promises you hear from celebrities hawking the concept on television. Both the Department of Housing and Urban Development and the Federal Trade Commission — as well as AARP — have extensive informative material online.
Benny L. Kass is a Washington and Maryland lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. Send questions to blkass@kasslegalgroup.com.
FAQs
By taking out a reverse mortgage, the divorcing spouses can pay off the existing mortgage and distribute the remaining cash out. One spouse remains on the mortgage and stays in the home, payment free; the other spouse who is moving out, keeps the remaining cash.
What happens to a reverse mortgage when you divorce? ›
Sell the home and use the proceeds to pay off the reverse mortgage balance, then split any remaining funds using an agreed-upon percentage. If both spouses are listed as co-borrowers, one spouse can choose to remain in the home and nothing is payable until they no longer use the property as their principal residence.
What is the dark side of reverse mortgage? ›
You still have home-related expenses
A reverse mortgage doesn't let you off the hook for property taxes, homeowners insurance premiums and HOA fees. If you fail to pay any of these expenses in a timely manner, that violates the reverse mortgage agreement and your home could be foreclosed.
Who benefits most from a reverse mortgage? ›
The reverse mortgage is most suitable for homeowners looking to remain in their home but see a need or benefit of having additional funds available. They do not want to have the burden of monthly mortgage payments in their monthly budget.
What is the biggest problem with reverse mortgage? ›
A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you're still borrowing the money and paying the lender a fee and interest.
What happens to the surviving spouse on a reverse mortgage? ›
Surviving spouses of reverse mortgage borrowers have rights. If you were married to the borrower at the time of the loan, you have the right to stay in the home after the borrower dies. This protection applies even if you were not listed on the reverse mortgage loan.
Can family take over reverse mortgage? ›
Yes, inheriting a house with a reverse mortgage is possible. If a loved one decides to take out a reverse mortgage on the home, and then chooses you as the heir to that home, then you would inherit the home with the reverse mortgage on it.
What does Suze Orman say about reverse mortgages? ›
Taking a loan too early
The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.
How many people have lost their homes due to a reverse mortgage? ›
A USA TODAY review of government foreclosure data between 2013 and 2017 found that nearly 100,000 reverse mortgage loans have failed, burdening elderly borrowers and their families and causing property values in their neighborhoods to crater.
Can you lose your house with a reverse mortgage? ›
Just like a traditional mortgage, with a HECM you are borrowing money and using your home as security for the loan. You must continue to pay for property taxes, homeowner's insurance, and make repairs needed to maintain your home or the lender can foreclose on the home.
Called the initial principal limit, you can only withdraw 60 percent of your available equity during the first 12 months, with the remaining equity becoming available after the first 12 months. The only exception is if your mandatory obligations exceed 60 percent of your available equity.
What happens if you outlive your reverse mortgage? ›
A reverse mortgage is repaid when the last borrower (or even the last eligible non-borrowing spouse) leaves the house or passes away. Typically, the home is sold and the proceeds from the sale are used to pay back the loan. The heirs will receive any remaining equity.
Can you pay off a reverse mortgage? ›
A reverse mortgage must always be paid back if you want to keep the home. Either by the original borrower or their heirs. If you do not wish to keep the home, you can sell it and use the proceeds to pay off the reverse mortgage balance.
Why are people disappointed with reverse mortgages? ›
Real estate closing fees.
As with a regular mortgage, reverse mortgages can rack up a variety of closing costs, including a home appraisal and inspection, title search, recording fees, mortgage taxes, and a credit check of the applicant, among others.
What are the bad side of reverse mortgage? ›
They come with significant risk, and when used improperly, a reverse mortgage could lead to losing your home to foreclosure or your heirs being left with very little when you pass on. They also come with fees and could impact your ability to earn other retirement income and benefits.
How to get out of a reverse mortgage? ›
The best way of getting out of a reverse mortgage is by repaying the loan balance in full. If you have a large balance that you are unable to pay in cash, the most common solution is to sell the home and use the proceeds to pay off the reverse mortgage.
Do you lose ownership with a reverse mortgage? ›
No. When you take out a reverse mortgage loan, the title to your home remains with you. This webpage has information about HECMs, which are the most common type of reverse mortgage. Most reverse mortgages are Home Equity Conversion Mortgages (HECMs).
How hard is it to get out of a reverse mortgage? ›
If a borrower chooses to change their mind about a reverse mortgage, they only have to alert their lender in writing within the allowable three business days from signing. The lender must then cancel all loan documents and return all fees, closing costs, and unused funds paid by the consumer within 20 days.
Can heirs walk away from reverse mortgage? ›
After the passing of the last surviving borrower, the reverse mortgage loan balance becomes due and payable. Your heirs can decide whether to repay the loan balance, keep the home, sell the house, and keep the equity, or walk away and let the lender dispose of the property.
Can a reverse mortgage be terminated? ›
These options may help. The easiest way to stop a reverse mortgage is to exercise your right to rescission. This right is a form of consumer protection that enables you to walk away from a reverse mortgage without penalty, for any reason, within three days of signing the loan agreement.
