Editor’s note: This is part seven of an ongoing series throughout this year focused on helping older adults navigate the financial difficulties of gray divorce. See below for links to the other articles in the series.
The subject of reverse mortgages is often met with skepticism from clients. A person going through a late-life divorce might even be perplexed by how a reverse mortgage might offer a potential solution to the financial stress of divorce.
I understand. Until recently I always associated reverse mortgages with late-night television infomercials, a product pitched by actors like Tom Selleck or Henry “The Fonz” Winkler. I had always lumped them in as something that was sold like a timeshare, variable annuities or indexed universal life insurance.
My research working with Certified Divorce Lending Professionals (CDLPs) and older divorcées has convinced me that the reverse mortgage can solve some key problems in gray divorce.
Most, but not all, reverse mortgages today are federally insured through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) Program and are available for homeowners ages 62 and up. Let’s review the key features of a HECM and how it might benefit late-life divorcées.
No monthly mortgage payment
HECM borrowers are not required to make monthly mortgage payments. The loan, which grows over time, is repaid when the homeowner sells the house, moves out or passes away. This can reduce financial strain for divorced clients living on a fixed income or facing uncertainty about future cash flow.
Unlike traditional mortgages, the borrower’s income and credit score aren't as important as their age and equity in the home. Borrowers with lower credit scores may have to pay a higher interest rate.
Home equity access
Divorce usually involves dividing assets, including the marital home. Reverse mortgages allow older homeowners to convert part of their home equity into tax-free cash, helping divorcées who need liquid assets to buy out their spouse’s share of the marital home or to fund new living arrangements without selling the home.
To qualify, in addition to being 62 years of age or older, you must own your home fully or have a low mortgage balance and meet HUD’s financial requirements.
Additional income stream
The proceeds from a reverse mortgage can supplement income, helping to cover living expenses and health care costs. Chris Bruser, a reverse mortgage specialist with Mutual of Omaha in Tampa, notes, “A divorced person may have had their net worth cut in half in divorce. The HECM helps preserve those investment assets by eliminating mortgage obligations. Those assets can be used to generate income from investments.”
Eligible borrowers qualify to receive disbursements either as a lump-sum payment, monthly payment or line of credit.
Non-recourse loans
Insured by the FHA, HECMs are non-recourse loans, meaning that the borrower or their estate will not owe more than the value of the home when the loan is repaid. The FHA guarantees that the loan will be repaid if it ever goes into default, so lenders are willing to offer HECM loans with low interest rates and flexible terms.
The HECM has been reformed over the years. One reform restricts the amount of funds available to a borrower, and another introduced underwriting requirements through a financial assessment. These reforms have coincided with a reduction in the rate of tax and insurance default before and after the reforms.
Bruser notes, “The HECM program has improved dramatically over the last 15 to 20 years, to ensure its longevity and utility for our aging population. After a basic consultation, a lot of the stigma goes away.”
Consider two potential solutions the HECM may solve for homeowners getting divorced later in life:
1. The marital home remains with one spouse.
A HECM on the marital home can provide the necessary funds for the departing spouse’s down payment on a new home.
John Drennen, a Certified Divorce Lending Professional with VIP Mortgage in Las Vegas, says, “Let's say we have a 70-year-old couple divorcing with a free and clear house and the man wants to stay in the house, and he doesn't have a lot of income. He can do a reverse mortgage to access the equity in the house to give to his wife, who can use that money as a down payment on the purchase of a place for herself, possibly using a HECM for the purchase of her new home. Neither spouse is saddled with debt-service obligations, and there's no forced sale of the marital home.”
2. The marital home is sold.
In this case, the proceeds would be divided. Each spouse could then use their share of the proceeds toward the down payment on a new home purchase and then use a home purchase HECM to pay the rest. Once again, neither spouse has a debt-service obligation. Nor is there the need to draw down liquid assets from bank or investment accounts.
Drennen notes an even more creative option where one spouse purchases a duplex or a fourplex with a HECM and lives in one unit and rents out the others to boost cash flow.
When a reverse mortgage isn't a good idea
Of course, a reverse mortgage is not always advisable. If the homeowner plans to move soon, the upfront costs involved in setting up a reverse mortgage loan may not make sense. While the HECM may provide more options than a traditional mortgage, including no mortgage payments and potential growth of a credit line of unused funds, the reverse mortgage is still more expensive than a traditional mortgage.
Also, if the homeowner is intent to leave an equity-rich home to their heirs, they may want to consider alternative arrangements.
Another consideration is eligibility for government benefits. While the proceeds from a reverse mortgage are not considered taxable income, they can affect eligibility for certain government assistance programs, such as Medicaid. It's important to understand how a reverse mortgage might impact eligibility for these benefits.
Drennen, pointing to the common misconception that with a reverse mortgage you no longer own your home, suggests homeowners reframe their approach: “When you buy a car, do you go and tell your best friend, ‘Hey, I just financed a Ford F-150 with Ford Credit’? No, you say, ‘I bought a new Ford F-150.’ You own your vehicle; you owe the bank. It’s the same with a HECM. You own the house; you owe the bank.”
I work with divorce lending professionals who specialize in helping older divorcées. If you are going through divorce and you’d like to learn more, please email me at andrew@wiserdivorcesolutions.com for a free consultation.
Other Articles in This Series
- Introduction: Happy New Year: Let’s Get a Divorce
- Part one: How Does a Gray Divorce Affect Social Security Benefits?
- Part two: In Gray Divorce, Two Financial Planning Yardsticks Are Key
- Part three: Don’t Forget to Update Beneficiaries After a Gray Divorce
- Part four: What Is a Lifestyle Analysis in Divorce?
- Part five: How Much Will Getting Divorced Cost You?
- Part six: Think of Prenups and Postnups as Financial Planning Tools
