In 2021, the Federal Housing Administration (FHA, a division of HUD) proactively expanded protections for individuals married to the borrower on a reverse mortgage loan secured by their primary residence, also called “non-borrowing spouses.” The FHA added these protections so that a surviving spouse had viable options to remain living in the home if the borrowing spouse needed a care facility (for more than 12 months) or in the event of their husband or wife’s death. Keep reading below to learn about “qualified non-borrowing spouse” and how you can be sure you’re covered.
Important notice: what you are about to read applies only to Home Equity Conversion Mortgages (HECM) loans. It does not apply to private (“proprietary”) reverse mortgages — speak to your reverse mortgage officer to understand the difference or read our article on age 55 reverse mortgages.
What is a reverse mortgage?
A reverse mortgage (which is most commonly an FHA-insured Home Equity Conversion Mortgage, or HECM for short) is a financial instrument that allows homeowners 62+ years old to access the untapped equity in their homes that has appreciated over the years.
Note that in 2021, several non FHA-insured lenders lowered the minimum eligible age for reverse mortgage borrowers to age 55 (called a “proprietary” or “private” reverse mortgage). This option is available in 19 states and Washington, DC.
There are several ways to receive the funds from a reverse mortgage (RM), which depend on the borrower’s needs. It’s outside the scope of this article but we will write about it soon! Since home prices likely increase over the next 10 years, banks offer a number of differing RM products.
There are no required payments for a reverse mortgage because the interest due and payable on the mortgage is deferred and added back onto the existing loan balance. A reverse mortgage loan is not typically due and payable until the reverse mortgage holder dies, sells the subject property, or moves out of the mortgaged property for a defined period.
What does non-borrowing spouse mean?
A non-borrowing spouse (NBS) is defined as a married individual that has been excluded as a borrower on their spouse’s reverse mortgage.
Reasons why a spouse would be excluded from a home equity conversion mortgage (HECM)
A husband or wife could be excluded from a reverse mortgage loan because they fail to meet the mortgage criteria’s age requirement of 62 – which is the most common reason. However, it is possible that a married couple decides to exclude the younger wife or husband (even if they qualify) as a means to increase the approvable loan amount.
The reality is, when determining a mortgage loan amount, age is a factor. Younger borrowers are offered a smaller amount as they are likely to live longer. So, leaving a younger borrower off the mortgage would likely result in an increase in the borrowing spouse’s principal limit.
Do both spouses have to be on a reverse mortgage?
If a married couple wants a reverse mortgage loan, but one is not yet 62, the younger spouse’s age would disqualify the couple’s eligibility. To qualify, the younger spouse will have to be omitted from the loan, because the older spouse qualifies alone as a solo reverse mortgage borrower on the loan .
With the federal government’s 2014 added protections for non-borrowing spouses (noted below), the need to have both spouses on the reverse mortgage becomes a less relevant issue.
Why does the non-borrowing spouse reverse mortgage need protection?
Many couples failed to recognize the potentially catastrophic consequences of having only one spouse on the mortgage loan. If they selected the one-borrowing-spouse option, it left the surviving borrower vulnerable (to remain in the house) upon the death of the last borrower.
What happens if a spouse dies with a reverse mortgage?
Prior to 2014, upon the death of the last borrower, the surviving spouse had two options –
- Repay the loan in full (by selling / refinancing / cash) because it was due and payable, or
- Face eviction from the home that secured the financing
In other words, a widow or widower continues to occupy the property if they had the money or the ability to qualify for a loan. The problem was for those widows and widowers who didn’t qualify or have the savings to satisfy the now due and payable loan.
2014 – the first non-borrowing spouse solution
HUD and the Federal Housing Administration (FHA) enacted certain HECM guideline changes for non-borrowing spouses they defined as “qualified.” Under the 2014 rule, if a couple with a spouse not yet 62 wanted a reverse mortgage, the spouse who is not old enough would be legally designated as the “non-borrowing spouse.”
These new policies allowed widows and widowers to take advantage of the HECM’s deferral period for payments. In other words, if you qualified, you could remain living in the home upon the death of the last borrower if you complied with certain HUD guidelines.
HUD defined a qualified non-borrowing spouse as –
- A person who is married at the time of the loan’s origination to the borrowing spouse AND has continued to be married over the life of the reverse mortgage.
- The non-borrowing spouse has lived and continues to live in the subject property.
To take advantage of this new 2014 rule and live in the home, the non-borrowing spouse had to:
- Document the death of the borrower within 90 days by providing –
- A marketable title to the property (which may need the help of an attorney) or
- The legal right (like a court order) to remain in the home; and
- And continue to meet the reverse mortgage requirements to pay property taxes and insurance premiums (like FHA PMI).
Ultimately, the problem with this 2014 policy change was that while it helped many non-borrowing spouses, it only applied to reverse mortgages that originated after August 4, 2014. The 2014 rule also excluded spouses who had to leave their homes for medical reasons but would otherwise still be eligible.
Fortunately, future changes addressed these gaping holes in the August 4, 2014, policy.
2015 – FHA issues additional clarification regarding non-borrowing spouses
The creation of the new category of ‘qualified non-borrowing spouse’ caused a bit of lender underwriting confusion regarding the calculation of the reverse mortgage’s principal limit.
As a result — the FHA offered the following updates to its guidelines:
- The Eligible Non-Borrowing Spouse. An eligible non-borrowing spouse occupies the property with the borrowing spouse as their primary residence. In addition, their age (in part) is included when determining the loan limit. However, eligible non-borrowing spouses are potentially protected and may be able to occupy the home if the borrowing spouse needs a nursing home or passes.
- Ineligible Non-Borrowing Spouses. An ineligible non-borrowing spouse is generally not an occupant of the home that secures the reverse mortgage. Their age is not used in calculating the borrower’s loan, and they are offered no protections should the borrowing spouse die or need a higher level of care.
If a reverse mortgagor is married to a younger spouse, the non-borrowing spouse will be formally designated, at closing, as an eligible or ineligible non-borrowing spouse. This designation is the protection a non-borrowing spouse needs if they want the right to occupy the home after the death of their wife or husband.
Can a spouse stay in a home with a reverse mortgage?
Yes, more than ever, a non-borrowing spouse has the right to remain in the property if the borrowing spouse dies or needs an assisted living facility or nursing home.
What happens if a spouse dies with a reverse mortgage?
In 2021, the FHA issued a new ruling to address the above-noted consumer and lender concerns regarding the fate of a spouse upon the death of the last mortgagor.
2021 – FHA updated ruling
The recent HUD rule change adds protections for the spouses of reverse mortgage holders. The rules of non-borrowing spouses now apply to all FHA-insured HECMs – even those originating prior to 2014.
A non-borrowing spouse is now protected if they continue to remain in the home and –
- The last surviving borrower died – or-
- The borrowing spouse has resided in a health care facility for at least 12 months
And note these changes —
- Spouses of reverse mortgage holders who were in a committed relationship when the HECM loan originated – but were prevented, by law, from marrying as same-sex couples but have since remained married prior to the borrowing spouse’s death.
- Non-borrowing spouses are no longer required to demonstrate that they possess the property’s marketable title or the legal right to remain as an occupant.
But this 2021 FHA rule update still doesn’t cover widows or widowers who were not married to the mortgagor/borrower at the time of the loan, except as noted above in the case where the marriage was not permitted by law, i.e., same-sex marriages.
Finally, a non-borrowing spouse remaining in the house has no access to additional funds on the remaining loan balance.
Does a non-borrowing spouse need to receive the closing disclosure?
Non-borrowing spouses are not mandated to sign the HECM loan documents, including the Closing Disclosure, the Mortgage, or the Right of Rescission (if applicable). However, they may have to sign an acknowledgment as to the existence of the HECM loan.
Can a non-borrowing spouse be on title on reverse mortgage?
Yes. The non-borrowing spouse’s name can and should be on the recorded deed.
How can a non-borrowing spouse gain better protection?
There are a few precautions to take to help boost a non-borrowing spouse’s protection.
First, the couple should rough budget to determine if the surviving spouse will have the capacity to keep up with the property expenses (property taxes, insurance, etc.) should the borrowing spouse die.
Certain reverse mortgage borrowers wait until both spouses are 62 years old because both will be eligible, and the non-borrowing spouse vulnerability matter becomes irrelevant. Finally, if the original loan had only one spouse, it may pay to refinance the HECM to include the second spouse when they become eligible. There are fees associated with this refinance, although considered minimal for mortgages.
Lastly, a more direct way to protect the non-borrowing spouse is by not getting a reverse mortgage at all! I know it may sound silly but consider that many parents sell their home for below market value to their kids, with the agreement the parents can stay in the home forever. Another solution is getting a home equity loan to consolidate debt or simply live off of.
The take-away – non-borrowing spouse & reverse mortgages
A reverse mortgage didn’t always come with the same protections for homeowners that are in place today, where a non-borrowing spouse (NBS) may be able to remain in the home under the same deferral period as the original borrower.
While these HUD changes greatly improve the protections for widows or widowers, there are no protections in place for the surviving spouse who has no capacity to keep up with the property taxes, insurance, and other maintenance issues.
In addition, it is important to note that the rules noted by the federal government only apply to Home Equity Conversion Mortgages that are federally insured and, therefore, backed by the Department of Housing and Urban Development (HUD). They do not apply to other proprietary reverse mortgage loans.
Although each consumer must weigh the pros and cons with a reverse mortgage of their financial decisions, for certain older adults, taking out a HECM is a good option. A HUD-approved housing counselor or real estate attorney can help you understand your loan options after 62.