In the past, if you weren’t listed as a borrower on a reverse mortgage on your home and your spouse died, you could very likely end up losing the home to a foreclosure. However, a recent District of Columbia federal court’s landmark ruling recognizes the need to protect surviving spouses in this situation. Read on to learn more about the groundbreaking ruling in Bennett et al. v. Donovan and how the outcome of this case (and new reverse mortgage rules) can protect you if your spouse passes away, but you are not named as a co-borrower on a reverse mortgage.
A reverse mortgage allows older homeowners to draw upon the equity in their home to provide a source of income in later years. This type of mortgage is different from a traditional mortgage because, instead of you paying the bank, the bank pays you. The payment to the borrower comes in the form of a lump sum, monthly amounts, or a line of credit. (You can also get a combination of monthly installments and a line of credit.) (Learn more about reverse mortgages in Nolo’s article Reverse Mortgages for Retirees and Seniors.)
Eligibility for a Reverse Mortgage
By far, the most common type of reverse mortgage available is the FHA's Home Equity Conversion Mortgage (HECM). (The U.S. government insures HECMs through the FHA.) To be eligible for this type of reverse mortgage, you must be at least 62 years of age. Also, you'd need to occupy the property as a principal residence and have significant equity in the property. (Learn more about HECMs by going to www.hud.gov and running a search for “FHA Reverse Mortgages (HECMs) for Seniors.”)
Taxes, Insurance, and Upkeep
While you don’t have to make any mortgage payments with a reverse mortgage loan, you are responsible for paying:
- property taxes
- hazard insurance premiums
- mortgage insurance, and
- home maintenance costs.
Repaying the Loan
If you take out a reverse mortgage, the loan doesn’t have to be paid back until you die, move, or sell the home. Generally, when one of these events occurs, the lender can take possession of the home through a foreclosure to repay the loan. (Learn more in Nolo’s article Foreclosure of Reverse Mortgages.) (You may also sell the home or deed it to the lender to repay the loan.)
Why Would a Borrower Leave His or Her Spouse Off the Reverse Mortgage?
Historically, the amount you can borrower with a reverse mortgage has depended on a number of factors, including the age of the youngest borrower. If your spouse was considerably younger than you, you'd get less money with a reverse mortgage if you included him or her on the loan.
Because of this, mortgage brokers sometimes advised homeowners to quitclaim the property to the older spouse and leave the younger spouse off the mortgage to increase the amount of the loan. In many instances, brokers misled younger spouses by assuring them that they would be able to remain in the home after the borrowing spouse died.
However, once the borrower died, the surviving spouse (who was not named on the loan) was often shocked to learn that the loan had to be repaid immediately or else the lender would foreclose on the property. (Under the terms of the mortgage, the lender can demand immediate payment on the loan if the "borrower dies and the property is not the principal residence of at least one surviving borrower.”)
The Bennett Ruling
In the case of Bennett et al. v. Donovan, 2013 WL 5442154 (D.D.C. Sept. 30, 2013), the court ruled that a Housing and Urban Development (HUD) regulation that allows lenders to demand that surviving spouses immediately repay reverse mortgage loans upon the death of their spouses violates federal law.
The plaintiffs in this case were the surviving spouses of reverse mortgage borrowers. Only their spouses, not the plaintiffs themselves, were listed as borrowers under the mortgage contracts. The plaintiffs stated that their reverse mortgage brokers told them that they would be protected from displacement from the home after their spouses died. However, when their spouses passed away, the lenders demanded immediate repayment of the loans.
Rights of the Surviving Spouse After the Borrower Dies
The plaintiffs claimed that the HUD regulation violated federal law because it did not protect them as non-mortgagor spouses. In particular, the plaintiffs relied on a federal statute that states HUD may not insure a reverse mortgage unless the repayment obligation was deferred until the homeowner's death. The term “homeowner” was defined as including the spouse of a homeowner. Accordingly, the plaintiffs argued that they were not required to repay the loan and were protected from foreclosure.
On the flip side, the regulations implementing the HECM statute state that the loan becomes due and payable upon the death of all "mortgagors." A “mortgagor” is the borrower listed on the mortgage. Furthermore, HUD’s form documents for reverse mortgages allow lenders to call the mortgage due upon the death of the mortgagor, even if there is a non-borrowing spouse still living in the home. As a result, lenders have historically called the loan due when the borrower named in the mortgage died, even if there was a surviving spouse.
Court Rules That Lenders Cannot Demand Immediate Repayment from Surviving Spouses
In the end, the court determined that HUD violated the statute when it insured the reverse mortgages of the plaintiffs' spouses pursuant to agency regulation, which permitted the loan obligations to come due upon the borrower’s death, even if the plaintiffs' spouses were still alive. The court also found, however, that it did not have the authority to require HUD to take any particular action to remedy its error and sent the matter back to HUD to correct the problem.
HUD Updates Loan Rules
To remedy this, HUD has amended its HECM program.
HECMs Taken Out On or After August 4, 2014. HUD policy now states that for FHA-backed reverse mortgages issued on or after August 4, 2014, the non-borrowing spouse may remain in the home after the HECM borrower dies (and the loan repayment will be deferred) so long as:
- the non-borrowing spouse is married to the borrower at the time of the loan closing (and remains married to the borrower for the duration of the borrower's lifetime)
- their spousal status is disclosed at the time of the closing
- the non-borrowing spouse is named in the loan documents
- the non-borrowing spouse has occupied, and continues to occupy, the property securing the HECM as his/her principal residence
- the non-borrowing spouse establishes legal ownership (or another ongoing legal right to remain in the home) within 90 days of the death of the last surviving borrower, and
- the non-borrowing spouse meets all of the obligations described in the loan documents. (See HUD Mortgagee Letter 2014-07.)
If the non-borrowing spouse fails to meet any of the requirements, the loan becomes due and payable.
HECMs Taken Out Before August 4, 2014. For HECMs taken out prior to August 4, 2014, the lender can elect to assign the mortgage to HUD (and the due and payable status of the loan will be deferred) when the last borrower dies, which then means a non-borrowing spouse can remain in the home. However, non-borrowing spouses are not guaranteed this right. The non-borrowing spouse must meet certain criteria to qualify. The surviving non-borrower spouse must:
- have been legally married to the HECM borrower at the time of loan closing and married to the borrower until the borrower’s death (or was in a committed relationship with the borrower at the time the loan was taken out, but was prohibited from legally marrying the borrower based on gender, and was legally married prior to the death of the borrower and remained married until the borrowing spouse's death)
- currently reside in the property secured by the HECM as his or her principal residence and previously resided there at origination of the HECM and throughout the duration of the borrower’s life; and
- within 90 days following the death of the HECM borrower, obtain good, marketable title to the property or a legal right (e.g., executed lease, court order, etc.) to remain in the property for life. (See HUD Mortgagee Letter 2015-03.)
In addition, even if the criteria is met, the lender could choose to call the loan due and payable (and pursue foreclosure) instead. (To avoid such a foreclosure, the non-borrowing spouse would have to pay off the loan, sell the home, or deed it to the lender).
Understanding the Risks Associated with a Reverse Mortgage
It is highly recommend that you proceed cautiously if you are thinking about taking out a reverse mortgage. Be sure that you know the risks and watch out for reverse mortgage scams. (Learn more in our article Reverse Mortgage Scams.)
Also, if you and your spouse are considering taking out a reverse mortgage, make sure both of you attend the counseling session that is required before signing HECM loan documents. Additionally, you should be familiar with the new rules governing reverse mortgages that went into effect in September of 2013 that reduce the initial amount available to borrowers, as well as new rules pertaining to a financial assessment requirement, as well as tax and insurance payments, which go into effect in 2015. (Learn more in Nolo’s article New Restrictions on Reverse Mortgages.)