Reverse Mortgage Options for Surviving Spouse

You’ll hear some scary stories about reverse mortgages.

Like this one: When a reverse mortgage borrower dies, the lender will sell the home within 30 days, leaving the grieving spouse with nowhere to live.

In reality, this doesn’t usually happen. Most reverse mortgage surviving spouses can keep living in their homes, even when the lender freezes the loan.

But this scary story isn’t completely false. In some cases, a reverse lender can foreclose. If you’re worried about that outcome, you can take action to prevent it.

When you can lose the house after the primary borrower’s death

What happens to the surviving spouse after the primary borrower on a mortgage loan dies or moves out for 12 consecutive months?

It depends on the spouse’s status:

• If the spouse is a co-borrower: Nothing happens. As long as the co-borrowing spouse remains in the home and fulfills the loan’s other requirements — like paying property taxes and keeping homeowners insurance — the loan remains active
• If the spouse is an eligible non-borrower: The reverse loan enters a deferral period. Surviving spouses can’t receive more money from the loan, but they can keep living in the home as long as they maintain the home, pay property taxes, and keep homeowners insurance
• If the spouse is an ineligible non-borrower: The reverse lender could foreclose. If this happens, the full balance comes due. To keep the home, the surviving spouse would need to pay off the reverse loan or refinance it

At this point, you may be wondering: What’s the difference between an eligible non-borrower and an ineligible non-borrower?

Am I an eligible non-borrower on my spouse’s reverse mortgage?

The FHA’s popular reverse mortgage program, the Home Equity Conversion Mortgage (HECM), created the eligible non-borrower status in 2014 to help more surviving spouses stay in their homes.

You’re an eligible non-borrower if the HECM originated on or after Aug 4, 2014, and if:

• You were already married to the loan’s primary borrower when the loan originated and you remained married until the borrower’s death
• You have lived in the home since the loan opened and plan to continue living in the home
• You were listed as an eligible non-borrower in the loan’s documents

Surviving spouses who meet these requirements can keep living in the home for the rest of their lives. When they die, move away, or fail to maintain the loan’s terms in some other way, the original borrower’s heirs will need to pay off the reverse loan, often by selling the home.

Am I an ineligible non-borrower on my spouse’s reverse mortgage?

Any non-borrower who doesn’t meet the above definition of eligible can be deemed ineligible. This includes any surviving spouse on a loan that originated before Aug. 4, 2014.

Even on a newer loan, spouses will be ineligible if:

• They weren’t yet married to the reverse loan borrower when the loan originated
• They haven’t been married continuously since the loan originated
• They plan to move out of the home
• They weren’t listed in the loan documents as eligible

Once again, these rules apply to HECMs, a specific brand of reverse mortgage run by the Federal Housing Administration. Most, but not all, reverse loans are HECMs. If you have another type of reverse loan, check your loan documents for specific rules.

Will all ineligible non-borrowers lose the home?

Many ineligible non-borrowers can keep living in the home after the primary borrower dies. Along with calling the loan balance due, the lender has a second option: Mortagee Optional Election Assignment, or MOE.

Through MOE, the lender can re-assign an ineligible non-borrower as an eligible non-borrower, allowing the surviving spouse to remain in the home.

There’s no guarantee the lender will choose MOE over foreclosure. If you, or your spouse, is an ineligible non-borrower on a reverse loan, it’s safer to assume the lender would choose foreclosure and plan ahead for that reality.

Solutions if you are in danger of losing the house

Aside from hoping their lender chooses the MOE path, how can ineligible non-borrowers keep from losing the home when the primary borrower dies?

By taking action now:

• Pay off the reverse loan: When the primary borrower pays off the reverse mortgage before death, the reverse lender no longer has any say in who lives in the home
• Refinance into a newer HECM: Refinancing an older HECM, or another type of reverse loan, into a modern HECM initiates eligible non-borrower status 
• Refinance into a forward mortgage: Couples who can afford the monthly payment can refinance into a traditional, forward mortgage. They may also be able to refinance using a home equity line of credit
• Sell the home: Selling the home should generate enough cash to pay off the reverse loan balance. Some borrowers can sell to a family member who allows them to keep using the home; others may be planning to move anyway
• Plan to use life insurance or another resource: Ineligible non-borrowers who have the cash to pay off the loan can, obviously, keep the home. For some surviving spouses, a life insurance payout can help pay off the loan

Unless you have cash to pay off the reverse loan, none of these are simple solutions.

Refinancing is usually the ideal solution for cash-strapped borrowers. But even that step depends on having enough equity — a challenge for many long-time reverse loan holders. This reverse loan calculator offers a ballpark estimate for how much you could refinance based on your current situation.

If lack of equity prevents you from qualifying for a new reverse loan, other types of loans on the market can help by refinancing 100% of the home’s value.

Why not make both spouses co-borrowers?

Ineligible vs eligible non-borrower? MOE vs foreclosure? None of this matters when both spouses are co-borrowers. With both spouses’ names on the reverse loan, the loan can stay active as long as one of the two spouses lives in the home.

So why don’t all borrowers just include their spouses on their reverse loan?

Age is the biggest reason. You have to be 62 or older to get a HECM. When one spouse is 62 but the other is, say, 59, only one spouse can be included.

Also, older borrowers can usually access more equity through a reverse loan than their younger spouses. This creates an incentive to leave the younger borrower off the loan even when the younger borrower is already 62.

Keeping the house vs keeping the reverse loan active

One more important distinction: Yes, reverse mortgage surviving spouses who qualify as eligible non-borrowers can keep living in the home. And, yes, that’s a big relief for many grieving spouses.

But those same non-borrowers won’t keep the other benefits of the reverse loan.

For example, if the primary borrower was receiving $500 a month from the reverse loan, those payments will stop when the borrower passes away or moves away for 12 consecutive months — including moving into assisted living.

Likewise, if the loan was set up as a line of credit, the lender will close the line of credit. No more cash will be available.

The best option for reverse mortgage surviving spouses

Reverse loan holders who are worried about their surviving spouse’s ability to keep the home should take action.

If you’re shopping for a new reverse loan now but don’t want to co-borrow with your spouse, make sure your spouse is listed as an eligible non-borrower. This is the best way to ensure your spouse can keep living in the home after you die.

If you already have a reverse loan that does not include your spouse as a co-borrower, or as an eligible non-borrower, ask your lender about its Mortgage Optional Election Assignment, or MOE, program.

If you’re not sure your spouse will be able to keep the home, try to replace that old loan with a new reverse mortgage — a new loan that includes your spouse as an eligible non-borrower or a co-borrower.