Divorce If You Have a Reverse Mortgage

A reverse mortgage allows eligible homeowners to convert the equity in their homes into a steady stream of income. Married couples can take out a reverse mortgage on a home that they own together, or one spouse can take out a reverse mortgage in their name alone.

Getting divorced raises an important question: What happens to a reverse mortgage once the marriage comes to an end?

How a Reverse Mortgage Works

A reverse mortgage is a special type of loan that allows eligible homeowners to withdraw equity from their homes. Reverse mortgages that are administered and overseen by the Federal Housing Administration (FHA) are known as home equity conversion mortgages (HECMs).

A reverse mortgage isn’t the same thing as a traditional home equity loan or home equity line of credit (HELOC). With either of those options, the home acts as security for the loan, and what you’re essentially getting is a second mortgage on the property. You make monthly payments to the lender, according to the terms and schedule set by the loan agreement. If you default on a home equity loan or HELOC, the lender may initiate foreclosure proceedings against you to recover what’s owed.

In a reverse mortgage agreement, the lender makes payments to the homeowner each month. There are no payments required on the part of the homeowner. Instead, the amount of equity that has been borrowed must be repaid when the borrower:

• Sells the home
• No longer uses the home as their primary residence (for example, if they move into long-term nursing care)
• Passes away

Reverse mortgages can offer couples a steady stream of income during their lifetime, but it’s not free money. Interest and fees will accrue, increasing the balance owed when it’s time to repay the loan.

Reverse Mortgages and Divorce

How a reverse mortgage is treated during a divorce proceeding can depend on whether either spouse wants to maintain ownership of the home and who is listed as the borrower. Typically, divorcing couples have one of three options to choose from:

• Sell the home and use the proceeds to pay off the reverse mortgage balance, then split any remaining funds using an agreed-upon percentage.
• If both spouses are listed as co-borrowers, one spouse can choose to remain in the home and nothing is payable until they no longer use the property as their principal residence. However, they may be required by their divorce decree to pay out an appropriate portion of the home’s equity to the other spouse.
• If one spouse wants to keep the home but is not listed as a co-borrower, they may choose to refinance the reverse mortgage into a new reverse mortgage or another type of home loan. Again, this might necessitate paying out a portion of the home’s equity to the other spouse.

Of these options, selling the home might be easiest unless both spouses are listed as co-borrowers. When each spouse is named on the reverse mortgage as a borrower, one can remain in the home without having to pay anything even if the other spouse moves out. However, a reverse mortgage can’t be put off indefinitely. At some point—specifically, once the remaining co-borrower sells the home, moves out, or passes away—the balance would have to be paid in full.

Using a Reverse Mortgage to Settle Divorce

In some cases, one spouse may choose to take out a reverse mortgage to satisfy financial obligations to the other spouse. For example, say you and your spouse decide to divorce and you want to remain in the home that you own together. As part of the settlement agreement, you have to give your spouse $100,000 to “buy them out” of their share in the home.

If you either don’t have $100,000 in cash or would rather not hand over a large share of your liquid assets, then you could take out a reverse mortgage instead. You can select a lump sum payment option, then use the funds to pay off your spouse. The reverse mortgage debt would not be payable until you sell the home, move out, or pass away.

However, it’s important to keep in mind that not everyone will qualify for a reverse mortgage. For example, if you’re interested in getting an HECM, you must:

• Be age 62 or older
• Own the home outright or have paid down at least 50% of the mortgage
• Occupy the property as your primary residence
• Not be delinquent on any federal debt
• Have financial resources to pay property insurance, taxes, homeowners insurance, and upkeep
• Attend a U.S. Department of Housing and Urban Development (HUD)-approved consumer counseling session
  

You’ll also need to satisfy the lender’s requirements for credit scores and income as well to qualify for a reverse mortgage.

The Bottom Line

Reverse mortgages can provide a supplemental stream of income for couples and divorced individuals in retirement. Before taking out a reverse mortgage, it’s important to understand the eligibility requirements as well as what your financial obligations might be if you decide to sell the home or move out. It’s also a good idea to compare the best reverse mortgage companies to find the right option to fit your needs.