Getting a Reverse Mortgage Without Jeopardizing Medicaid

For older homeowners who need cash, a reverse mortgage offers an elegant solution — a way to borrow from home equity without adding more strain to the monthly budget.

Reverse mortgages come with costs, too. The costs could include losing access to Medicaid.

But there’s good news: Unlike interest and fees, losing Medicaid is a cost borrowers can avoid.

How a reverse mortgage can jeopardize Medicaid

Medicaid provides health insurance coverage for lower-income Americans. The federal government funds this program, but state governments decide who is eligible.

To decide whether you’re eligible, your state will look at your personal finances, including your income, your retirement accounts, and your bank accounts.

Applicants with large savings or checking account balances — larger than $2,000 for individuals and $3,000 for married couples in most states — may be ineligible for Medicaid.

Because of these rules, receiving a lump sum of cash from a reverse mortgage could be hazardous to your Medicaid application or renewal.

Strategies to get a reverse mortgage without becoming ineligible for Medicaid

A reverse mortgage won’t automatically cut off your access to Medicaid. There are ways to borrow from your home equity without inflating your bank account.

To get a reverse mortgage without becoming ineligible for Medicaid, you could:

Receive monthly payments

Most reverse mortgages, including the FHA’s popular Home Equity Conversion Mortgage (HECM), let borrowers receive monthly payments instead of receiving a lump sum of cash.

You could set up your reverse loan to pay out just enough money each month to ease your cash flow problems. Since you’d be spending the loan’s payments on living expenses, your bank account balance wouldn’t swell, jeopardizing Medicaid coverage.

Use a credit line

Rather than paying out cash, reverse loans can also use your home equity to secure a credit line. That way you could pull cash when you need it. You wouldn’t have to park a huge sum of cash in your bank account.

These credit lines work a lot like credit cards, except with a much lower interest rate — and no required monthly payments.

This strategy has an added benefit: You can leave more equity in your home, saving money on long-term interest and fees.  

Get a single-purpose reverse mortgage

Single-purpose reverse mortgages don’t pay cash directly to homeowners. Instead, they use cash from equity to pay a bill, like your property taxes or your homeowners insurance.

This could solve your cash flow problems indirectly by lowering your annual expenses. A single-purpose loan excels at easing living expenses without putting Medicaid in danger.

Plan for your lump sum

Most state Medicaid plans won’t count a single vehicle as an asset. So you could receive a lump sum of cash from a reverse mortgage and use the cash to pay off your car. You’d no longer have a car payment, which should create room in your monthly budget for other living expenses.

Be sure to plan this out well in advance. Reverse loan cash staying in your account for too long could complicate your Medicaid renewal. Cash sitting in your account for more than 30 days will count the money as an asset. 

Does getting a reverse mortgage help you get Medicaid?

Some borrowers think reducing their home equity by getting a HECM, or another type of reverse mortgage loan, will boost their Medicaid eligibility. Understandably, they think adding mortgage debt will reduce their assets. 

This isn’t true. Why? Because Medicaid doesn’t count the value of your primary residence as an asset. Leaving the equity in your home won’t hurt eligibility. In fact, leaving the equity untapped is better for eligibility than having cash from equity sitting in the bank.

However, Medicaid counts real estate investments differently than primary residences. If you own rental homes or a vacation home, those assets will likely make you Medicaid-ineligible.

Some people put these types of assets into irrevocable trusts, especially if they expect to enter assisted living later in life. Assets in an irrevocable trust are no longer considered personal assets. This strategy won’t work for everybody in all situations; ask your certified financial planner, estate planner, or attorney for advice before making these types of plans.

What if I move into assisted living with a reverse mortgage?

Medicaid can help pay for long-term assisted living, so if you think assisted living is in the future — and if you’re counting on Medicaid to help pay for it — be sure to keep Medicaid eligibility in mind as you make reverse loan decisions.

That said, assisted living and reverse mortgage loans don’t always mix even when Medicaid isn’t a factor.

Reverse mortgage lenders require borrowers to live in their home. So when a borrower moves into long-term assisted living for more than 12 months, the reverse mortgage lender can call the loan balance due in full.

This isn’t always a problem. Homeowners who never expect to live in their home again, for example, can sell the home and pay off the reverse mortgage.

But for other homeowners — those who need assisted living only temporarily or those whose spouses don’t need assisted living — this rule can be a deal breaker.

Exceptions to the primary residence rule

Fortunately for borrowers who need assisted living, there are some exceptions to the primary residence rule.

• 12-month exception: When you have an FHA-backed Home Equity Conversion Mortgage, the most popular type of reverse loan, you can live away from home for up to a year without paying off the reverse loan balance, if due to medical reasons
• Co-borrower exception: As long as one borrower lives in the home, the loan can stay open. As a result, one borrower could enter assisted living while the other borrower remains in the primary residence

These rules apply to the FHA’s HECM reverse mortgage program. Other kinds of reverse mortgages may not always include these protections. Shop around and ask questions if you aren’t sure.

Do reverse mortgages affect Medicare and Social Security benefits?

A lot of people confuse Medicaid with the other big federal health insurance program, Medicare. Medicare is not “means-based” like Medicaid. That means personal finances won’t directly affect eligibility. Instead, Medicare eligibility depends on age: Americans 65 and older can enroll.

It is true that income can affect how much retirees pay in Medicare Part B premiums each month, but cash from a reverse mortgage isn’t considered income; a reverse loan shouldn’t affect Medicare eligibility.

Reverse mortgage cash could affect Social Security SSI payments, though. SSI stands for Supplemental Security Income. Monthly SSI payments go to children and adults who have disabilities.

As with Medicaid, SSI considers an applicant’s assets, so cash from a reverse loan could lower or eliminate your SSI payments. Don’t receive a lump sum of cash from your reverse loan if you’re worried about losing benefits. Instead, opt for receiving monthly payments or opening an equity-backed credit line.  

Medicaid and a reverse mortgage? It can work if you plan ahead

If you depend on Medicaid for health insurance, be careful with your reverse mortgage application.

While cash you receive from the loan won’t count as income, the state will see money from the loan as an asset if it stays in your account more than 30 days. Since Medicaid is needs-based, being flush with cash can kick you out of the program.

There are good workarounds. Receiving monthly payments, opening a credit line, using a single-purpose reverse loan — all of these plans can offer the benefits of a reverse loan without parking cash in your account, jeopardizing Medicaid.

Be sure to ask about these alternative payouts when you apply for your reverse loan.