Reverse Mortgages are a unique, government sponsored, FHA insured financial product that can be extremely useful in a divorce.
Oftentimes, divorces are caused by extreme financial stress. One party is constantly starting businesses, losing the business, gambling or spending every available dollar. The marital home becomes a back-up savings account, in that the mortgage payments were essentially the only way the couple were ever saving.
In some areas of the country, like Naples, Florida, the values of homes have skyrocketed in recent years. And due to rising interest rates and stringent lending standards, home equity loans are much less common (especially among people with credit issues), so the equity in those homes have remained untouched.
In a relationship that’s crumbling where the only asset is a marital home, reverse mortgages are an option whereby one party can keep the marital home while still awarding the other party their financial interest in the home.
Normally, a house must be sold to divide the equity in the property. The Florida statute says that “in distributing the marital assets and liabilities between the parties, the court must begin with the premise that the distribution should be equal” Fla. Stat. Sec. 61.075(1)
Often one party has an attachment to the marital home and would prefer to keep it, in lieu of selling the house and finding a new place to live, especially if the parties to the divorce are much older. For most people who want to keep a house in a divorce, they get a home equity line of credit (HELOC). But, when your credit is weak, because of either party’s spending and/or your lack of income to qualify, home equity loans are not available. Plus, the monthly payments on a HELOC could create a hardship. However, because the qualifications to get a reverse mortgage are less stringent, they may be available to parties in these situations.
A reverse mortgage is where the homeowner relinquishes a portion of the equity in the house in exchange for a lump sum of money and/or a series of payments…but the owner gets to stay in the house until they sell the home or pass away (as long as property taxes and insurance payments remain current).
If the homeowner stays in the house until they pass away, the heirs to the house generally sell it. At the close of that sale, the reverse mortgage balance needs to be satisfied, and the heirs keep the difference between the selling price and the reverse mortgage balance. If the heirs want to keep the home, they can satisfy the reverse mortgage balance with existing funds or obtain a traditional refinance.
At least one of the homeowners need to be 62 or older to apply for a reverse mortgage.
Even if you have an outstanding mortgage on the marital home you still may be able to get a reverse mortgage. Proceeds from the reverse mortgage will pay off the original mortgage.
As previously stated, a reverse mortgage may provide a lump sum to pay the spouse who is leaving, to compensate that party for their half of the equity. The spouse staying in the house may receive any remaining reverse mortgage proceeds in monthly payments. These payments can supplement social security or whatever assets the party has left.
There are no monthly mortgage payments required with a reverse mortgage.
The downsides of a reverse mortgage are as follows:
- Because of the upfront FHA insurance fee, the closing costs for a reverse mortgage are generally higher than other forms of mortgages. The closing costs are factored into the loan, so there are no out-of-pocket costs.
- Reverse mortgage proceeds may affect your eligibility for Medicaid or SSI.
- If a non-borrowing resident lives in the house with you and a “maturity event” occurs (usually your passing), this person will have no right to remain in the house. The reverse mortgage balance becomes due when the last homeowner passes away.
In Naples, Florida, I recommend David Edel for further education as to whether a reverse mortgage would be a good fit to resolve your financial issues in your divorce. After you consult with my Naples, Florida office visit David’s office just 9 minutes away from mine in Naples, Florida. Directions below: