In the past, if you weren't listed as a borrower on a reverse mortgage and your spouse died, you could lose your home to foreclosure. But a District of Columbia federal court's landmark ruling recognized the need to protect surviving spouses in this situation. As a result of this decision, reverse mortgage rules were revised and just might be able to protect you if your spouse passes away, but you aren't named as a co-borrower on the reverse mortgage.
The most common type of reverse mortgage is an FHA-insured Home Equity Conversion Mortgage (HECM). This type of mortgage is different from a traditional mortgage because, unlike regular mortgages, a borrower receives payments in the form of monthly payments, as a line of credit, in a lump sum, or a combination of monthly payments and a line of credit. The loan must be paid off when a specific event—like if the borrower dies, moves into a nursing home for over 12 months, or transfers the property to a new owner—happens. Though, a lender can also call the loan due if you breach the terms of the mortgage, like by failing to pay the property taxes.
If, after being called due, the borrower doesn't repay the loan, sell the property, or deed the property to the lender, then a foreclosure will likely happen.
The amount you can borrow with a HECM depends on a number of factors, including the age of the youngest borrower. So, if your spouse is considerably younger than you, you'll get less money with a reverse mortgage if you include your spouse as a borrower on the loan. For this reason, mortgage brokers sometimes advise homeowners to quitclaim a property to the older spouse and leave the younger spouse off the mortgage to increase the amount of the loan. In many instances in the past, brokers misled younger spouses by assuring them that they would be able to remain in the home after the borrowing spouse died.
But once the borrower died, the surviving spouse—who was not named as a borrower 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 could demand immediate payment on the loan if the "borrower dies and the property is not the principal residence of at least one surviving borrower.")
In the case of Bennett et al. v. Donovan, 2013 WL 5442154 (D.D.C. Sept. 30, 2013), the court ruled that the Housing and Urban Development (HUD) regulation that allowed lenders to demand that surviving spouses immediately repay reverse mortgage loans upon the death of their spouses violated 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. But when their spouses passed away, the lenders demanded immediate repayment of the loans.
The plaintiffs claimed that the HUD regulation violated federal law because it didn't protect them as non-mortgagor spouses. In particular, the plaintiffs relied on a federal statute that says 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 weren't required to repay the loan and were protected from foreclosure.
On the flip side, the regulations implementing the HECM statute stated 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 a nonborrowing spouse was 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.
In the end, the court determined HUD had violated federal law by insuring reverse mortgages that permitted the loan obligations to come due upon the borrower's death when the plaintiffs' spouses were still alive. The court also found, however, that it didn't 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.
To remedy this issue, HUD amended its HECM program.
HUD policy states that for FHA-backed reverse mortgages issued on or after August 4, 2014, the nonborrowing spouse may remain in the home after the HECM borrower dies (and the loan repayment will be deferred) so long as certain criteria, including but not limited to, the following, are met.
If the nonborrowing spouse fails to meet the requirements, the loan becomes due and payable.
In 2015, HUD announced that a nonborrowing spouse could remain in the home if the HECM was taken out before August 4, 2014, and certain criteria were met—but only if the lender chose to assign the mortgage to HUD. HUD then will defer repayment of the HECM, as long as the nonborrowing spouse fulfills certain conditions, similar to the ones above, such as:
If a HECM is ineligible for assignment or a lender chooses not to assign the loan to HUD, then a foreclosure may happen.
It is highly recommended that you proceed cautiously if you're thinking about taking out a reverse mortgage. Be sure that you know the risks and watch out for 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 rules governing reverse mortgages that reduce the initial amount available to borrowers, as well as rules pertaining to a financial assessment requirement, and tax and insurance payments.
If you have further questions about how reverse mortgages work or how to preserve the right of a nonborrowing spouse to live in the property after the borrower's death, consider talking to a financial planner, an estate planning attorney, or an elder law attorney. If you're concerned about a reverse mortgage foreclosure, consider talking to a foreclosure lawyer in your state.