A reverse mortgage can give you additional income to cover basic living expenses, home repairs, renovations, or unanticipated expenses. Despite their many drawbacks, reverse mortgages are popular. Even with their limitations, reverse mortgages can coexist with living trusts:
Let’s look at each scenario in detail.
Learn more about reverse mortgages, including the upsides and downsides, in Nolo’s article Reverse Mortgages for Retirees and Seniors.
If you already have a reverse mortgage on your home at the time you create your living trust, you can transfer it into your trust using the real estate powers granted to you as trustee of your trust. It is important to notify your lender before you initiate a transfer. Your lender will want to verify that your trust agreement meets the same requirements it would need to meet if you were a trustee getting a reverse mortgage on a home that is already in your living trust. For example, the lender will confirm that all current beneficiaries named in the trust (not contingent beneficiaries with a future right to the balance of the trust) have the right to live in the home indefinitely. Your lender may have additional stipulations, such as requiring the trust to formally assume the borrower's obligation to repay the debt to avoid difficulty in enforcing the mortgage, so prompt notification is essential.
Now, let’s address the second situation: Obtaining a reverse mortgage for a house whose title is in your living trust. You’ll likely consider the most popular type of reverse mortgage, a Home Equity Conversion Mortgage, or HECM. Private lenders issue HECMS, but the federal government backs (guarantees) them. The lender makes cash available to qualified borrowers from the equity they have in their homes.
To qualify for a reverse mortgage, borrowers must:
The amount a qualified homeowner can receive depends on the borrower’s age, current interest rates, and the lesser of the home’s appraised value or sale price up to the federally-set borrowing limit. (12 U.S.C. § 1715z-20.)
Eligible borrowers can choose to receive regular payments, unscheduled installments similar to a line of credit, a combination of regular payments and a line of credit with an adjustable rate mortgage, or a single lump sum distribution at closing with a fixed rate mortgage. For qualifying homeowners with homes that appraise over the HECM limit, a proprietary (privately insured) reverse mortgage could offer more cash because it does not have a set borrowing limit.
Assuming that you qualify for a reverse mortgage (see above), you still need to actually obtain one. To get a reverse mortgage on a home that is already in your living trust, you’ll need to confirm that your trust and all borrowers meet your lender’s requirements.
Before you can get a reverse mortgage on your home, you need to verify that your trust gives you the power to do this. Your living trust almost certainly grants you, as trustee, broad powers to manage the real estate in the trust. Living trusts typically grant the trustee the power to sell trust property, and to borrow money and to encumber trust property, including trust real estate, by mortgage or another method, but you should read the trust document or consult with an estate planning lawyer to review the full scope of your powers regarding trust real estate.
Once you confirm that you have the power to encumber trust real estate, the next step is to check that you meet the reverse mortgage lender’s requirements for homes held in living trusts.
First, you and your trust’s beneficiaries (everyone who currently receives benefits from the trust) must be eligible for a reverse mortgage, so all of you must be age 62 or older and living in the home. Second, your trust must be a revocable living trust (created during your lifetime and under your control until death) and the lender must review and approve your trust agreement for enforceability and validity. Specifically, the lender is interested in knowing that each borrower (you and all beneficiaries) has the right to live in the home indefinitely, and that your trust instructs the trustee or successor trustee to notify the reverse mortgage lender of any changes in who is living in the home.
Regardless of whether your living trust or your reverse mortgage came first, your loan does not need to be repaid until you and your beneficiaries transfer title or sell the home, no longer live in the home full-time, pass away, or breach the terms of the loan agreement. For example, if you don’t pay your property taxes or homeowners’ insurance premiums, or fail to keep your property in reasonable condition, your lender can call your loan due.
A financial planner or elder law or estate planning lawyer can give you additional guidance on the practical and legal issues involved in reverse mortgages. In particular, if you are considering transferring a home that already has a reverse mortgage into a living trust, you’ll need to know exactly what the lender will require. Don’t count on finding general answers on your own—lenders tend to explain their conditions only when dealing with someone who is poised to take action. An attorney can help you navigate that territory.