Dealing with the emotional fallout from a difficult divorce is challenging at any age, but the process can be particularly complex for older couples with a reverse mortgage (also known as Home Equity Conversion Mortgages (HECMs).
As the “silver splitter phenomenon” becomes increasingly more common, it’s crucial to understand how this arrangement impacts the division of assets and financial planning during a divorce.
Let’s further explore the key considerations, options, and potential strategies for divorcing couples with a reverse mortgage.
How Reverse Mortgages Actually Work
Most consumers have probably seen television commercials about reverse mortgages, but many are unclear on the inner workings of this type of loan product.
According to the City of Chicago’s Department of Housing, “a reverse mortgage loan is a type of home equity loan that is designed to enable senior homeowners (typically 62 or older) to receive income” from the equity in their homes while they continue to reside there. It is not the same as a traditional home equity loan or home equity line of credit (HELOC).
Unlike regular mortgages, there are no monthly payments; instead, the lender advances funds that accrue interest over time. Homeowners repay the loan (principal + accrued interest) when they move out permanently, sell the house, or pass away.
While these funds can be incredibly useful for senior homeowners facing medical bills or other unforeseen expenses while on a fixed income, they are not without risk. Reverse mortgage lenders can impose high fees and closing costs, and borrowers must continue to pay for mortgage insurance. The process and accompanying paperwork should be thoroughly understood before committing.
With real estate-related scams on the rise, homeowning seniors are a particularly vulnerable target — and the reverse mortgage industry offers an irresistible opportunity for fraudsters, with a trusting, exploitable elder audience holding millions in untapped home equity.
Families should be on the lookout for these red flags which could signal a potential scam:
- Unsolicited offers: reputable mortgage lenders don’t send offers without being contacted
- Requests for personal information such as Social Security or financial account numbers
- Pushy sales tactics or pressure
- Time-sensitive or “rush” offers
- Unexplained costs and hefty upfront fees; legitimate lenders provide a full financial disclosure statement
- “Money-back guarantee” and other too-good-to-be-true promises
Property owners who are interested in a reverse mortgage should always consult with the National Reverse Mortgage Lenders Association and Better Business Bureau to check for required licensing before signing on the dotted line.
The Impact of Divorce
In a divorce situation, the treatment of a reverse mortgage depends on several factors, including whether both spouses are listed as co-borrowers and if either spouse wants to maintain ownership of the home.
Even if only one spouse is on the reverse mortgage, the other spouse may have rights to the home equity depending on your state laws and pre- or post-nuptial agreements.
Typically, divorcing couples with a reverse mortgage have three main options to consider.
Selling the Marital Home
In most cases, both spouses are listed as borrowers on a reverse mortgage as long as they both meet the requirements. This means that either spouse has the right to remain in the home after divorce, provided they can buy out the other spouse’s interest and continue meeting the loan’s obligations.
If you and your ex-spouse decide to sell the house, the proceeds from the sale will be used to pay off the reverse mortgage in full. Any remaining equity will then be divided according to your divorce agreement.
This option provides a clean break and allows both parties to start fresh. However, it’s important to consider market conditions and potential capital gains taxes when choosing this route. If the housing market has declined, the sale may not generate enough funds to cover the entire reverse mortgage balance, and you may be responsible for the shortfall.
One Spouse Stays
Reverse mortgages have residency requirements. The borrower(s) must occupy the home as their primary residence. In a divorce, if the borrowing spouse moves out, the loan may become due and payable. It’s essential to communicate with the lender and explore options to meet residency requirements or address the timeline for loan repayment.
If only one spouse was on the reverse mortgage, the spouse who wants to stay will need to refinance the loan into a traditional mortgage or a new reverse mortgage in their sole name. The spouse keeping the house may need to compensate their ex-partner for their share of the home equity, considering the reverse mortgage has reduced the available funds. The non-borrowing spouse may have certain protections if they were married to the borrower at the time of the loan’s origination and were established as an eligible non-borrowing spouse.
Coming to an Agreement
In some cases, one spouse may want to keep the home but isn’t listed as a co-borrower on the existing reverse mortgage. In this situation, refinancing your reverse mortgage can be a viable option.
While less common, some divorced couples choose to continue co-owning the home and maintaining the reverse mortgage. This arrangement requires a high level of cooperation and clear arrangements about responsibilities.
In some cases, a reverse mortgage can be used as a tool to facilitate the divorce settlement itself, with the funds being used to satisfy financial obligations to the other spouse as part of the divorce agreement.
Knowledge is Power
Divorce with a reverse mortgage is a complex process. However, with the right legal and financial guidance, you can navigate this emotionally charged situation effectively and secure a fair and equitable settlement for both spouses.
To ensure your rights are protected, it’s vital to consult with a knowledgeable family law advocate and approach property division negotiations with an open mind. At the Law Offices of J. Jeltes, Ltd., we make it our mission to ensure that our clients understand the divorce process every step of the way. We’re here for you — reach out to schedule a confidential consultation today.
