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?
- A reverse mortgage is a way for eligible homeowners to tap into the equity in their homes without getting a standard home equity loan.
- A divorcing couple has several ways to handle reverse mortgage debt, including selling the home to pay off the balance or refinancing the reverse mortgage.
- Reverse mortgages can be used to finalize a divorce settlement by allowing one spouse to remain in the home.
- Before agreeing to a reverse mortgage, it’s important to understand how the equity that is being paid out as income must be repaid.
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.
While homeowners make no payments toward a reverse mortgage as long as they use the home as their primary residence, they are still responsible for paying property taxes, homeowners insurance, and upkeep and maintenance costs.
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.
If one spouse opts to remain in the home, then the reverse mortgage lender may require a copy of the divorce decree to remove the other spouse from the debt.
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 a majority 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.
HUD offers an online search tool that allows you to look up approved HECM lenders and their requirements.
Who can qualify for a reverse mortgage?
A reverse mortgage is a type of loan that allows eligible homeowners, those at least age 62, to withdraw equity from their homes. They must own the home outright or have paid down most of the mortgage balance. No payments are due during the borrower’s lifetime as long as they live in the home and use it as a primary residence. Interest and fees can accrue, increasing the reverse mortgage balance due later.
How does divorce affect a reverse mortgage?
When a divorcing couple has a reverse mortgage debt, they’ll need to decide whether one of them will stay in the home or whether they’ll sell it. If one spouse is retaining the home and is listed as a co-borrower on the reverse mortgage, then that spouse won’t pay anything toward it as long as they live in the home. But if they sell it or move out, then the balance will need to be repaid in full.
Does a spouse have to be on a reverse mortgage?
A spouse does not have to be listed as a co-borrower on a reverse mortgage. They can also be listed as a non-borrowing spouse if they meet U.S. Department of Housing and Urban Development (HUD) requirements. How a spouse is listed on a reverse mortgage can affect their ability to stay in the home if the other spouse moves out or passes away.
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.