What is an eligible non-borrowing spouse on a reverse mortgage?

What is an eligible non-borrowing spouse on a reverse mortgage?

Until recently, it was possible for widows or widowers to lose their homes after their spouses died if the dying spouse was the only party listed on a reverse mortgage.

Why would only one spouse in a marriage relationship be included in a reverse mortgage? In many situations, only one spouse was at least 62 years old, the minimum age required to obtain a reverse mortgage. If a married couple wants to get a reverse mortgage together, both have to be at least 62.

Also, because the available funds are based on the age of the youngest borrower, many early reverse mortgage borrowers would leave the younger spouse off the contract, even if that spouse was 62 or over, especially if there was a considerable age difference. Doing so allowed the borrowers to obtain a higher principal limit from the contract.

But there used to be major consequences to leaving off one spouse from the contract. What used to occur frequently is that the older spouse died, and the lender would close the loan and demand repayment. Unless the surviving spouse had enough money to repay the loan, he or she would be forced to move out and sell the home, per the conditions of the contract.

A recent change in reverse mortgage law

A revision in the law two years ago provided increased protection to spouses who are not named on a reverse mortgage contract. Today, spouses who are not listed on the reverse mortgage can remain in their homes after the death of the borrower by being designated Eligible Non-Borrowing Spouses.

Non-borrowing spouses can stay in their homes following the passing of the borrower on a reverse mortgage under the following conditions provided by the Federal Housing Administration:

  • The lender agrees to allow the spouse to remain
  • The borrower and spouse were legally married at the time the reverse mortgage closed, or the two parties were in a committed same-sex relationship but were prohibited under state law from being legally married at the time they closed on the reverse mortgage, but become legally married before the death of the borrower.
  • The surviving spouse lived in the home at the time the reverse mortgage was originated.
  • The surviving spouse continues to live in the home as her or her primary residences, continues to make tax and insurance payments, and maintains the property under the terms and conditions of the HECM.

Access to loaned funds cut off

Non-borrower spouses, however, will not have access to any remaining loan funds after the borrowing spouse has died. If the reverse mortgage provided monthly payments, those payments would cease once the borrower has died. If a reverse mortgage line of credit were established, the non-borrowing spouse would not have access to those funds after the borrower has died.

At the same time, interest will continue to accrue on the unpaid balance until the loan is repaid.

The new rules also impact new reverse mortgages obtained when one spouse has not yet reached age 62. No longer do both spouses have to be at least 62. An underage spouse can be considered an eligible non-borrowing spouse.

The downside of this arrangement is that the reverse mortgage principal limit will be based on the age of the younger spouse, even if it’s under 62. This will significantly reduce the amount a couple can borrow from a reverse mortgage.

For example, a 65-year-old with a $300,000 home can expect a principal limit of about $162,600. If the borrower has a 58-year-old spouse, the spouse becomes a non-borrowing spouse and the principal limit from the reverse mortgage drops to $150,000.

Another downside is that a younger spouse can no longer be omitted from the reverse mortgage contract as a way to obtain a higher principal limit. So in the above example, even though the 58-year-old spouse negatively impacts the amount available from the reverse mortgage, he or she must be included as an eligible non-borrowing spouse.