Reverse Mortgage Challenges When in a Care Facility

A reverse mortgage can allow a homeowner to tap a portion of the equity in their home while they are still living in it. The loan doesn’t need to be repaid until one of three things happens that can trigger a reverse mortgage maturity event: The borrower sells the home, the borrower dies, or the borrower moves out for a certain number of months. The first two are pretty clear-cut, but the third can be the source of considerable confusion.

This article explains what happens with a reverse mortgage when the borrower moves out to go into a care facility. Note that this article covers the rules for federally insured home equity conversion mortgages (HECMs), the most common type of reverse mortgage. If you have a proprietary reverse mortgage (also called a jumbo reverse mortgage) or a single-purpose reverse mortgage, review the fine print on your loan document carefully to see whether—and, if so, how long—an absence triggers a maturity event for your particular loan.

When the Reverse Mortgage Borrower Is Single

A single person with a reverse mortgage living alone typically must repay the loan if they have not lived in the home as their principal residence for over 12 consecutive months. So, for example, someone who goes into a rehab facility for a few months—but then returns to their home—can keep their reverse mortgage. However, if they move into a facility and stay past that 12-month deadline, they are considered to have moved out permanently and must repay the loan.

The rules are different if the borrower is single and has a co-borrower or is married.

When There’s a Co-Borrower on the Mortgage

A reverse mortgage can have more than one borrower. Co-borrowers may be spouses (see next section) or someone else.

Regardless of their relationship, if a co-borrower is on the mortgage, that person can remain in the home and continue collecting mortgage proceeds after their co-borrower dies or moves into a care facility for 12 months or longer. The mortgage becomes due only after the second borrower dies or moves out.

When the Reverse Mortgage Borrower Is Married

For reverse mortgages, spouses fall into three categories:

Co-borrowing spouse: If the spouse is listed as a co-borrower on the loan, they can remain in the home and continue to collect payments from the reverse mortgage. These same rules apply if a co-borrower isn’t the other borrower’s spouse.
Eligible non-borrowing spouse: If a spouse was younger than age 62 when their spouse took out the reverse mortgage, they didn’t qualify to be a co-borrower on the loan. However, for reverse mortgages issued after Aug. 4, 2014, they could be listed in the loan documents as a non-borrowing spouse. If they were, and if they meet specific other criteria, they can remain in the home after the other spouse has been out of the house over 12 months. The other requirements are that:

• The loan can’t be in default for reasons such as failure to pay property taxes or insurance premiums.
• The non-borrowing spouse must have been legally married to the borrowing spouse when the mortgage closed and still be legally married to them.
• In cases where a couple was forbidden by law to marry based on gender when the mortgage closed, the non-borrowing partner may be eligible if they were in a “committed relationship” with the borrower at the time that the mortgage closed and was legally married subsequently (“prior to the death of the borrower” is what the language says) and “remains married to the HECM borrower, in situations in which the HECM borrower has resided in a healthcare institution for more than twelve consecutive months.”
• The non-borrowing spouse must have lived in the property when the mortgage closed, and it must still be their principal residence.

Ineligible non-borrowing spouse: Spouses who don’t meet the criteria to be considered “eligible” can’t remain in the home if their spouse moves out for longer than 12 months (unless they can work out an arrangement with the lender). At that point, the reverse mortgage comes due. Other family members or anyone living in the home in that situation must also move out or buy the home and pay off the mortgage.

Reverse Mortgages and Medicaid Eligibility

Many Americans use Medicaid to pay for nursing home or other long-term care expenses. (Medicare provides coverage only in very limited circumstances.)

Medicaid has strict income and asset limits, which can vary by state. Payments from a reverse mortgage are not considered income, although they might be considered assets if they go unspent.

A Medicaid applicant’s home is an exempt (or “non-countable”) asset up to certain limits (generally $713,000 or $1,071,000 in equity, depending on the state). If a single person with a reverse mortgage goes into a care facility for 12 consecutive months or more, they (or their heirs) would have to sell the home and pay off the reverse mortgage. If any money is left over, it would become a non-exempt asset and count against them for Medicaid eligibility. To become eligible again, they would then need to spend that money to pay for their own care.

In the case of a married couple, the person remaining in the home is referred to as the “community spouse.” The community spouse can stay in the home for the rest of their life. However, the state may put a lien on it and attempt to recover the expenses that Medicaid paid for the institutionalized spouse’s care after the community spouse dies.

The Bottom Line

A reverse mortgage generally must be paid back when the last borrower dies, sells the home, or moves out for 12 consecutive months or longer. That rule can present a complication when a borrower moves out into a care facility and cannot return within 12 months. However, any co-borrowers can remain in the house without triggering the loan becoming due. And, if the borrower had a non-borrowing spouse living in the house, that person may be able to remain in the home if they meet certain criteria.