Reverse mortgages are a great way for seniors to access the equity they’ve built up in their homes. However, there are some things you need to know before taking out a reverse mortgage, especially if you’re going through a divorce. In this blog post, we will discuss a frequently asked question, ‘ How does a divorce affect a reverse mortgage?’
When a getting divorced couple has reverse mortgage debt, they must decide whether one of them will continue living in the home or sell it. If one spouse is keeping the home and is listed as a co-borrower on the reverse mortgage, that spouse will not make any payments as long as they continue to reside in the home.
- A reverse mortgage is a loan that homeowners over the age of 62 can take out to convert a portion of their property value into cash.
- One partner may decide to get a reverse mortgage so that they can fulfill their monetary responsibilities to the other partner in certain circumstances.
- Counseling is important because it helps you understand the pros and cons of a reverse mortgage, and it allows you to ask any questions you may have.
How a Reverse Mortgage Works
A reverse mortgage is a loan that homeowners over the age of 62 can take out to convert a portion of their property value into cash. Aside from that, the loan does not have to be repaid until the borrower moves, sells, or dies.
There are no monthly mortgage payments required with a reverse mortgage; however, the borrower is responsible to pay property taxes and homeowners insurance, maintaining the property in good repair, and keeping up with any homeowners’ association dues.
The lender makes payments to you instead of you making payments to the lender in a reverse mortgage arrangement. With this type of loan, you don’t have to worry about making monthly payments back to the lender, and you can use the money for anything you need.
However, it’s important to note that a reverse mortgage is a loan, and it must be repaid eventually. When the last surviving borrower dies, sells the property, or permanently moves out of the home, the loan evolves into owed and payable.
Additionally, to be eligible for a HECM, the borrower must own the property outright or have a low outstanding mortgage balance that can be paid off at closing with proceeds from the HECM.
Likewise, borrowers must also complete a counseling session with an approved HUD counselor to learn about how reverse mortgages work and explore alternatives to taking out a HECM.
Reverse Mortgages and Divorce
If you and your spouse are getting a divorce and you have a reverse mortgage, there are a few things you should know about how it will affect your divorce proceedings.
First, it’s important to understand that the treatment of a reverse mortgage during the divorce process can vary depending on who is listed as the borrower on the loan as well as whether or not either spouse wants to keep ownership of the home.
Generally speaking, divorcing couples can select from one of the following three options:
1. The first option is to repay the remaining balance of the reverse mortgage before selling the property. Any additional cash should then be divided according to the proportion that was previously decided.
2. The second option is for both partners to be named as co-signers on the mortgage. In this case, either partner can choose to stay in the home while the other does not have to make any payments, as long as they continue to use the home as their primary residence. On the other hand, the divorce decree may stipulate that they must transfer a reasonable amount of the equity in the home to the other partner in the marriage.
3. Even if one partner is not named as a co-borrower on the existing reverse mortgage, it is possible to refinance it into a new reverse mortgage or another sort of house loan. Besides, this may necessitate one spouse paying money to the other in the form of a portion of the house’s equity.
Selling the home could be the least difficult of these choices, provided that both partners are not co-borrowers on the mortgage. If both partners are named as borrowers on the reverse mortgage, then one of the partners can continue to live in the property without having to make any payments even if the other partner leaves the home.
On the other side, a reverse mortgage’s closure can’t be put off indefinitely. The remaining loan balance will ultimately have to be paid off in full, especially when the last surviving co-borrower sells the home, leaves, or dies.
Using a Reverse Mortgage to Settle Divorce
One partner may decide to get a reverse mortgage so that they can fulfill their monetary responsibilities to the other partner in certain circumstances.
Take, for instance, the scenario in which you and your spouse have decided to get a divorce but you intend to continue living in the home that you and your spouse jointly own.
You and your spouse have agreed on a settlement, and you are required to pay one hundred thousand dollars to “buy them out” of their share in the house as part of the agreement.
You have the option of getting a reverse mortgage rather than handing over a significant portion of your liquid assets if you do not have $100,000 in cash on hand or if you would prefer to avoid doing so.
You have the option of selecting a one-time, lump-sum payment, after which you can put those funds toward paying off your spouse. You will not be required to make payments on the reverse mortgage obligation until you either sell the property, move out, or depart
While obtaining a reverse mortgage may be beneficial for some, it is not an option for everyone.
For instance, if you are interested in obtaining a HECM, you are required to do the following:
- If you are over 62 years old and own your home outright or have paid down a large portion of your mortgage, the opens in a new windowHome Equity Conversion Mortgage (HECM) might be right for you. This reverse mortgage plan is insured by the government, so it’s backed by security.
- With a HECM, you can access a portion of your home equity to use as cash. The money can be used for any purpose, such as supplementing your retirement income, paying off debts, or making home improvements.
- Unlike a traditional forward mortgage, there are no monthly payments required with a HECM. Instead, the loan balance is repaid when the house is sold or when the last borrower passes away.
- Before you can obtain a HECM, you must attend a consumer counseling session that has been approved by the (HUD). This counseling session will help you to understand all of the risks and potential consequences associated with taking out a reverse mortgage. Once you have received counseling and met all of the eligibility requirements, you can apply for a HECM through an FHA-approved lender.
Who Is Eligible for a Reverse Mortgage?
There are a few things that impact qualification for a reverse mortgage. The most important factor is age. To be eligible, you must be at least 62 years old.
In addition, your home must be your primary residence. You also need to either own your home outright or have paid down a significant portion of your mortgage balance. If you have a lot of debt, that could impact how much money you’re able to borrow through a reverse mortgage.
Finally, you’ll need to complete a counseling session with a HUD-approved counselor to learn more about the implications of taking out a reverse mortgage. If you meet all of these requirements, you may be eligible for a reverse mortgage.
How Does Divorce Affect a Reverse Mortgage?
Impacts on reverse mortgage counseling
If you’re considering a reverse mortgage, you should know that a reverse mortgage lender requires counseling before closing. Counseling is important because it helps you understand the pros and cons of a reverse mortgage, and it allows you to ask any questions you may have.
Divorces can complicate the process of getting a reverse mortgage, so if you’re divorced or considering divorce, be sure to let your counselor know.
If one party requests counseling, the ex-spouse or soon-to-be-ex must also receive counseling, even if they are not on the home’s title or deed. Couples are more inclined to seek counseling when the proceeds from the reverse mortgage are included in the final settlement.
Many individuals, on the other hand, are shocked to discover that this regulation applies and choose to wait until after a divorce is completed before applying for a reverse mortgage. They may go through counseling on their own in this situation.
Impacts on origination
Divorce can sometimes complicate the process of getting a reverse mortgage. If a couple is divorcing, they may not be on good terms and may have difficulty communicating with each other.
In some cases, loan originators may need to act as mediators in order to help the couple finalize the deal. Although this can make the process more difficult, it’s still possible to get a reverse mortgage even if you’re going through a divorce.
Impacts on aging in place, particularly for women
Divorce can be a difficult and emotional process, with both parties often feeling insecure about their future. For women, divorce can have a particularly significant financial impact. Women typically earn less than men and may have been out of the workforce for some time due to caring for children or elderly relatives.
As a result, they can find themselves in a difficult financial situation following divorce. A reverse mortgage can provide much-needed financial flexibility for women in this situation, allowing them to stay in their homes as they age.
The top 3 benefits of a reverse mortgage in a divorce?
- If you’re divorced and approaching retirement, a reverse mortgage could be the answer to your supplemental income needs.
- It can provide extra money for other expenses like medical bills, food, and other necessities.
- You don’t have to pay back the loan until after you’ve passed away or sold your home.
Does a Spouse Have to Be on a Reverse Mortgage?
A married couple can obtain a reverse mortgage on a home they jointly own, or either spouse can obtain a reverse mortgage in their name.
How does divorce impact reverse mortgage decisions?
Who is on the reverse mortgage and what one or both borrowers decide will determine whether a divorce causes the reverse mortgage to become due?
Whether the loan becomes due if both spouses are on the reverse mortgage loan depends on the loan’s guidelines. If the loan is in good standing, and one spouse wishes to continue living in the home while the other moves out, the divorce will not result in the mortgage becoming due. If one of the borrowers remains in the home, the terms of the reverse mortgage will not change.
When only one spouse is the borrower and they decide to leave the home, the reverse mortgage becomes due. To repay the reverse mortgage, the borrower can sell the home or refinance it.
How Does A Divorce Affect A Reverse Mortgage FAQs
What is the difference between a reverse mortgage and a standard mortgage?
Borrowers with a reverse mortgage do not make monthly mortgage payments. The loan is repaid when the borrower leaves the home or dies. A standard mortgage, however, is a loan used to acquire or preserve a residence, land, or even other types of property investment. The borrower agrees to repay the lender over time, generally through a series of periodic principal and interest payments. The property is then used as security for the loan.
Can I buy a house with a reverse mortgage after a divorce?
Yes. This is especially attractive for a person who is downsizing after a divorce and who meets the lender’s loan requirements.
In certain instances, it is possible to obtain a reverse mortgage purchase loan that allows you to buy a new home and obtain a single reverse mortgage transaction. This efficiently facilitates the transition.
You must contact your loan servicer if you and your spouse have a reverse mortgage and get divorced.
In order to qualify for a reverse mortgage after getting divorced, you will need to provide the court-approved divorce decree. The agreement must state that your ex-spouse is awarded the property and identify them as the only person responsible for the reverse mortgage.
Without these documents, you cannot obtain a new reverse mortgage on your own.
What is the first thing someone should do when considering a reverse mortgage in a divorce?
When faced with the possibility of divorce, many couples find themselves struggling to keep their heads above water financially. If you are considering a reverse mortgage in a divorce, it is important to seek professional guidance. A reverse mortgage consultant can help you to understand all of your options and make an informed decision about whether a reverse mortgage is right for you.
Are there any risks of using a reverse mortgage after divorce?
As with any other financial obligation, a reverse mortgage is attributed with certain risks.
Taxes, homeowners’ insurance, repairs, maintenance, and homeowners’ association dues, among others, can put your home at risk if you don’t pay them. If you do not meet these obligations, the loan can go into default.
If you are considering a divorce and want to know more about how it could impact your reverse mortgage, please call me or schedule a free consultation. I will be happy to answer any questions you have and help you through this difficult time.