"Trailing spouses" younger than 62 will soon be able to stay in homes that have a reverse mortgage-even though they were not included in the original reverse mortgage contract.
In a letter to all reverse mortgage lenders from Carol Galante, Federal Housing Commissioner, Galante announced the new amounts of equity available to persons who take out a reverse mortgage with a spouse under the age of 62. The sliding scale of Principal Limit Factors (PLF) is reduced given the age of the younger spouse.
The new rules go into play for all reverse mortgages written after August 4, 2014.
For example, a person signing a reverse mortgage with a 55-year-old non-borrowing spouse would be eligible for 48.4 percent of the value of a property. If the non-borrower were age 62, the PLF increases to 52.4 percent of the property's value.
"This letter begins the full protection to a non-borrower spouse younger than 62," said Brian Cook, mortgage advisor and reverse mortgage specialist at Alpine Mortgage Planning in Federal Way. "New guidelines state they are not required to sell the home to satisfy the mortgage if the primary borrower passes away or moves out permanently."
Most surviving spouses who remain in the home after one spouse dies were part of the reverse mortgage agreement when it was first signed. However, many were left out of the document, usually because they were too young to qualify or because including them would have meant a reduced amount. Now, more and more of these trailing spouses who were never vested in the reverse mortgage want to stay in the home without paying off the underlying reverse mortgage. The new guidelines solidify that.
AARP, the group formerly known as the American Association of Retired Persons, provided the trailing spouse spark by filing lawsuits against HUD. The AARP cases (Bennett et al v. Donovan; Plunkett et al v. Donovan) are against U.S. Department of Housing and Urban Development regarding its policies for the Home Equity Conversion Mortgage (HECM), the country's most popular reverse mortgage program.
In a capsule, the unresolved cases involved a surviving spouse who wanted to stay in her house after her husband died. Both women had not been listed on the loan. The judge ruled in favor of the lender because under the loan contract, the loan became due if the property was not the principal residence of one surviving borrower.
"Now, the non-borrowing spouse can enter in what's called 'unlimited deferment period' where they can continue to live in the home," Cook said. "The non-borrowing spouse will be required to be put onto title, or remain on title, 90 days after the reverse mortgage becomes due. They also must keep up property taxes and insurance and be married at the time the borrowing spouse left the home on a permanent bases or passed away."
A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax-free.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can't owe more than the value of the home.
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