Non-Borrowing Spouse Protections and Reverse Mortgages
Reverse mortgages didn’t always have the same consumer protections they have today. While new laws do a better job of preventing some bereaved spouses from getting pushed out of their homes, the rules don’t cover all of them. They also don’t protect against impoverishment.
Still, eligible non-borrowing spouses face fewer risks than they used to, especially those considering a new reverse mortgage. Whether you’re already a non-borrowing spouse, considering the possibility, or know someone who is, here’s what you should know about what protections exist and what risks non-borrowing spouses may face.
- New reverse mortgage laws effective in September 2021 offer better protections than ever to eligible non-borrowing spouses.
- The new laws can help eligible non-borrowing spouses remain in their homes when the borrowing spouse dies or permanently moves into assisted living or a nursing home.
- Ineligible non-borrowing spouses still have few protections.
- Neither category of non-borrowing spouse can get money from the loan after the borrowing spouse dies or moves out.
- The date when the borrower got their reverse mortgage still affects the non-borrowing spouse’s rights.
Non-Borrowing Spouse Protections before Aug. 4, 2014
Knowing about the history of non-borrowing spouse protections and reverse mortgages is essential if you have an older reverse mortgage and is helpful if you have a newer loan—or are considering one.
In the past—specifically, for HECMs with case numbers created before Aug. 4, 2014—even if the younger spouse was at least 62 and thus eligible to be a co-borrower, the older spouse might have chosen to be the sole borrower in order to get more money from the loan (age is a factor in how much you can get, with younger getting less). The borrowing spouse might also have removed themselves from the title to make the loan happen. After all, both spouses would benefit from the money, especially if they choose the lump-sum reverse mortgage payment plan.
The heartbreaking result was that many widows and widowers unexpectedly lost their homes after the borrower died. The home was collateral for the loan, and the lender had every right to foreclose.
The Jones Case
A noteworthy 2018 court decision illustrates why the old rules were a problem. Caldwell Jones, an exceptional basketball player for the Philadelphia 76ers in the 1980s, took out a reverse mortgage on July 28, 2014. He died suddenly on Sept. 21, 2014. Per the terms of his reverse mortgage, the loan servicer began the foreclosure process. Vanessa Jones, his wife and non-borrowing spouse, sued and ultimately lost.
Had the loan’s case number been assigned on or after Aug. 4, 2014, when the FHA first changed borrowing rules to protect non-borrowing spouses, she might have won—or never had to file suit in the first place.
The FHA provides loan case numbers after the borrower submits an application but before the loan closes. Case number designation happens once an FHA system validates an applicant’s property address, Social Security number, and other loan information supplied by the lender.
Improvements to Non-Borrowing Spouse Protections
“From 1989 to Aug. 4, 2014, the note, deed, and loan agreement were written without any consideration of non-borrowing spouses,” says Dan Hultquist, a national reverse sales training specialist with Fairway Independent Mortgage Corp. in Canton, Ga. “In essence, statutory requirements were in conflict with HECM contracts. Since then, HUD mandates that language be included in every HECM loan to establish specific rights for spouses.” Widows and widowers did have the option to refinance the home and repay the reverse mortgage, but they weren’t always able to qualify for that.
On June 15, 2015, HUD created a way for reverse mortgage loan servicers to assign a pre–Aug. 4, 2014, loan to HUD instead of calling it due and payable upon the death of the last borrowing spouse. Assigning the loan, however, was an option, not a requirement. Lenders could (and still can) continue to foreclose in these cases.
The good news is that many HECM loans “are already assigned to HUD before the death of the last borrower,” says Hultquist, which gives many pre–Aug. 4 non-borrowing spouses protection against losing the home.
Non-Borrowing Spouse Protections on or After Aug. 4, 2014
HUD improved non-borrowing spouse protections for reverse mortgages with case numbers designated on or after Aug. 4, 2014. It changed the law so that newly issued loan contracts would allow non-borrowing spouses to stay in their homes after a borrowing spouse died or moved permanently into a care setting.
Some people may think that all non-borrowing spouses have been protected against losing the home since then, but that’s a misconception. “Because FHA’s traditional interpretation is embedded in existing, legally binding contracts, FHA has no authority to alter it with respect to existing loans,” the agency wrote in Mortgagee Letter 2014-07.
Also, making retroactive changes could put the Mutual Mortgage Insurance Fund (MMIF) at risk. That fund limits lenders’ losses and protects homeowners and their heirs from ever owing more on a reverse mortgage than the home is worth.
2021 Reverse Mortgage Changes
HUD changed its reverse mortgage rules several more times since 2014, each time adding additional protections for non-borrowing spouses. HUD publishes new rules in mortgagee letters (MLs), and the latest changes came in 2021=2, with ML 2022-06 (also called ML 22-06). Letters in 2015, 2019, and 2021 made other important changes.
The new rules make some things easier for widows and widowers who were not borrowers. For one, they no longer have to prove that they’re on the title if they want to keep living in the home, no matter the reverse mortgage case number. They also protect eligible non-borrowing spouses against losing the home if their borrowing spouse doesn’t die but permanently moves into a healthcare facility.
However, this protection is guaranteed only if the borrowing spouse’s reverse mortgage is dated Aug. 4, 2014, or later. Otherwise, it depends on whether the lender assigns the loan to HUD. In other words, the latest changes did not totally solve the pre–Aug. 4, 2014, non-borrowing spouse problem. “Very few in the industry understand the nuances contained in ML 15-02, ML 15-15, and ML 21-11,” says Hultquist.
Additional Protections for Non-Borrowing Spouses
Before either spouse can get a reverse mortgage, both must complete a counseling session with a HUD-approved HECM counselor. This meeting can help them understand the implications of leaving one spouse off of the loan. Also, since 2015 HUD has distinguished between eligible and ineligible non-borrowing spouses to help clarify the non-borrowing spouse’s rights (or lack thereof).
Eligible non-borrowing spouse protections apply to same-sex couples who were in committed relationships but not legally allowed to marry when the reverse mortgage was obtained if they marry before the borrower dies.
Eligible vs. Ineligible Non-Borrowing Spouses
An eligible non-borrowing spouse lives with the borrower in the mortgaged home as their principal residence. They get protections that help them remain in the home if the borrowing spouse dies or moves out first. Also, the amount of equity the borrowing spouse can access through the loan is based in part on the eligible non-borrowing spouse’s age.
You can’t get a HECM reverse mortgage in Texas with an eligible non-borrowing spouse, according to Hultquist. “Technically, Texas law doesn’t prohibit it directly,” he says. “Rather, state laws are unfavorable to the point where lenders are not willing to offer the option.”
An ineligible non-borrowing spouse either doesn’t live with the borrower in the mortgaged home at all or the home is not their principal residence. They may not have been married to the borrower when the loan closed. They don’t get protections that help them remain in the home if the borrowing spouse dies or moves out first. Reverse mortgage proceeds don’t take this spouse’s age into account.
If you do take out a reverse mortgage while married to a younger, non-borrowing spouse, they will be formally documented at closing as either an eligible non-borrowing spouse or an ineligible non-borrowing spouse. This documentation protects an eligible non-borrowing spouse’s right to remain in the home during the deferral period if the borrowing spouse dies first.
Retaining the Right to Live in the Home
Eligible non-borrowing spouses will be able to keep living in the home if the borrowing spouse dies or moves out first as long as they keep meeting the reverse mortgage’s other requirements: paying property taxes and insurance and maintaining the home. They enter what HUD calls a “deferral period,” during which the lender won’t require the reverse mortgage to be repaid.
The rights of non-borrowing spouses can be complicated. Consult a HUD-approved reverse mortgage counselor, a real estate or elder law attorney, or an independent financial advisor if you have questions about your circumstances. Beware: Many legal and financial professionals are not well versed in reverse mortgages; you need to find someone with expertise in the subject.
For some borrowers the deferral period can still pose problems with running out of money. Regardless of your reverse mortgage case number date, the non-borrowing spouse is not allowed to receive any more proceeds from the reverse mortgage, because they are not a borrower on the loan. They can’t be added to the loan without refinancing, and they can’t assume the loan from the borrowing spouse.
Why Can’t I Borrow as Much if I Have an Eligible Non-Borrowing Spouse?
Reverse mortgage proceeds are based in part on the borrower’s life expectancy. The loan balance grows over time, so the longer the borrower or non-borrowing spouse lives in the home, the more likely it is that the loan balance will exceed the home’s value. When this happens, the FHA mortgage insurance fund loses money. To help keep the fund solvent, younger homeowners can’t borrow as much.
How Can a Non-Borrowing Spouse Gain Better Protection?
First, the non-borrowing spouse should make sure their name is on the home’s title. And if it is, they should not allow it to be removed.
Second, the couple should make sure the non-borrowing spouse will be able to keep up with property taxes and homeowners insurance, so they won’t lose the house when the borrowing spouse dies.
Third, the couple may want to wait until they’re both at least 62 to take out the loan, or else they should plan to do a HECM-to-HECM refinance as soon as the younger spouse is 62 or older and eligible to become a borrower.
This type of refinance usually has “very low closing costs because of the way HUD calculates the up-front mortgage insurance premium,” says Hultquist. However, he adds, if the remaining spouse plans to sell the home, refinancing may not be the best strategy.
What Non-Borrowing Spouse Protections Do Proprietary Reverse Mortgages Have?
Non-FHA reverse mortgages are different from FHA reverse mortgages (HECMs) in many ways, and their features vary by lender. Accordingly, each proprietary reverse mortgage product treats prospective borrowers with non-borrowing spouses differently. Some won’t allow a homeowner with a non-borrowing spouse to get a reverse mortgage, according to Hultquist. Others, he says, will adjust the interest rate, loan pricing, or required loan-to-value ratio to account for the non-borrowing spouse.
What Has Happened to Non-Borrowing Spouses With Older Reverse Mortgages?
Courts have ruled that even though the intent of federal law is to protect non-borrowing spouses from losing the home after their borrowing spouse dies, the contract between the borrowing spouse and the reverse mortgage originator determines the non-borrowing spouse’s rights. This risk still exists for some non-borrowing spouses. If HUD assigned the borrowing spouse’s reverse mortgage case number before Aug. 4, 2014, the non-borrowing spouse could still lose the home.
The Bottom Line
A surviving spouse who has no right to stay in the home under the reverse mortgage contract and no assets to repay the loan has to deal not only with grieving but also with the emotions and logistics of moving. This is a heartbreaking possibility, and one that fewer borrowers should face in the future under newer laws. These protections apply only to HECM reverse mortgages, however, and proprietary reverse mortgage borrowers may be at greater risk.
Read your contracts carefully. Better yet, get a disinterested expert to help you understand your contract. Then, if you learn that it doesn’t say what you thought it did, you can take action.