Reverse Mortgage Loan Guidebook for Attorneys

REVERSE MORTGAGE LOANS

Guidebook for Attorneys

Attorney uses in legal planning for senior clients

Mortgage Loan?

A reverse mortgage is a home-secured loan whereby the borrower can defer repayment of the loan balance until a later date. They’re designed to help improve the quality of life for older American homeowners and homebuyers. While there are various types of reverse mortgages, the Home Equity Conversion Mortgage (HECM) loan is the only reverse mortgage insured by Federal Housing Administration (FHA) and the most commonly used option. This guidebook refers to HECM loans only.

A HECM allows homeowners 62 and over to convert a percentage of their home equity into cash (drawn at closing), fixed monthly advances (for a set number of months or the life of the loan) or a growing line of credit to draw from as needed for any use. The borrower can pay as much or as little toward the loan balance each month as

they wish or opt to make no monthly mortgage payments. As is required of any homeowner, a HECM borrower still needs to pay critical property charges, like taxes, insurance and maintenance. HECMs must be in the first lien position. Some or all of the HECM loan proceeds can be used at closing to pay off (refinance) an existing mortgage. Essentially, if your older-adult client is still carrying a mortgage, they would be turning their monthly-payment-required mortgage into a monthly-payment-optional mortgage.

The unpaid HECM loan balance accrues interest and fees and eventually must be repaid. However, the HECM balance is not typically due and payable until the last surviving borrower permanently leaves the home (e.g., passes away or moves into a nursing home).

With Reverse in Your Toolkit

Attorney Practice Areas

• Divorce

• Elder Care

• LTC and Medicaid Planning

• Tax Planning

• Real Estate and Closing

• Foreclosure Prevention

• Bankruptcy and Creditors

• Litigation

“Even the attorney who feels negatively toward reverse mortgages needs to know and understand them and how they could be used in legal planning. Blanket advising against reverse mortgages on general principles without reasons specific to a particular client’s situation is somewhere between incomplete legal analysis and legal malpractice.”

— Jim Zeigler Elder Law Attorney

Now What?

When the loan is due and payable, it’s typically satisfied via the sale of the home on the open market. The borrower or the heirs can pocket any profit if the sale price exceeds the HECM loan balance.

All reverse mortgages are non-recourse loans—there is no recourse for the mortgage balance in excess of the home value. With the HECM loan, the FHA guarantees that neither the borrower nor the heirs will ever owe more than the home is worth when sold.*

A maturity event triggers the loan balance to become due and payable. Some common maturity events include:

• The death of the last surviving borrower (if a nonborrowing spouse is still occupying the home, they may have additional rights to remain in the home and defer repayment of the loan)

The sale of the property

• Permanently moving out of the home

• Failure to pay the property-related taxes, insurance or HOA dues

• Allowing the home to fall into significant disrepair

Any heirs need to be aware of the reverse mortgage. When the last surviving borrower dies, the heirs should contact the loan servicer as soon as possible. The heirs will have a few options based on what they want to do with the house and if the house has any remaining equity.

If the heirs DON’T want to keep the home, they can do one of the following:

Sell the home and keep any profit from the sale

If there is still equity in the home—meaning the price the home would sell for on the open market is greater than the reverse mortgage loan balance—selling it can be a good route for the heirs to consider. If the heirs decide that they want to sell the home, they should notify the servicer of that decision right away. The heirs

*There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance and maintaining the home. Credit subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.

will then have up to six months to sell the home (in some cases, the U.S. Department of Housing and Urban Development [HUD] may grant additional time to the heirs to find a buyer).

Sign a deed-in-lieu of foreclosure

If the reverse mortgage balance exceeds the home’s value, the heirs would have no economic benefit from selling the home on the open market. Instead, the heirs can sign a deed-in-lieu of foreclosure, allowing them to turn the home over to the lender and walk away from it. As a reverse mortgage is a non-recourse loan—the home stands for the debt, not the borrower—the heirs will not be required to pay the difference between what’s owed on the reverse mortgage loan balance and the value of the home because the FHA insurance will cover any remaining loan balance. If the heirs choose this option, it will not affect their credit.

If the heirs DO want to keep the home, they also have options.

They can pay the lesser of the loan balance or 95% of the property’s appraised value

In situations where the reverse mortgage loan balance exceeds the home’s value, the heirs can keep the home by making a short payoff of 95% of the appraised value. This would typically involve the heirs taking out a new traditional forward mortgage on the home.

In situations where the reverse mortgage loan is less than the home’s value, the heirs can pay off or refinance the loan balance to keep the home.

The Rights of Non-Borrowing Spouses

If a non-borrowing spouse (i.e., a spouse not named as a borrower in the original loan application) still occupies the home after the death of the last surviving borrower, they may have additional rights. Per new rules issued in August 2014 by the HUD, after the last remaining borrower dies, an eligible non-borrowing spouse may be able to stay in the home and defer repayment of the reverse mortgage until they die or permanently move out. This is known as the deferral period, during which no further HECM payments will be made from the loan. The eligible non-borrowing spouse must still keep up with the obligations of the HECM, such as paying property taxes and insurance.

Reverse Mortgage Uses in Legal Planning

From estate planning and tax planning to foreclosure prevention and litigation, reverse mortgages can be an effective tool used in legal planning. A borrower could benefit from a reverse mortgage through increased cash flow, increased portfolio longevity, decreased income taxes and increased net worth and legacy for heirs.*

With a reverse mortgage, the borrower still owns the home and remains on title. The deed doesn’t change hands until the loan is due and payable—usually when the borrower permanently moves out or passes away. Reverse mortgages can also be done when the property is in a revocable or irrevocable trust.

Here are some examples of how a reverse mortgage could be used in legal planning for your senior clients.

Silver Divorce Scenario 1 — Spousal Buyout

A common divorce situation is that one spouse wants to continue living in the home while the other wants to move out with their share of the home equity. The reverse mortgage could allow one ex-spouse to stay in the home, with the reverse mortgage used to pay a necessary portion of the home’s equity to the other ex-spouse.

The buyout can happen for the departing spouse without disrupting either retirement plan because of the reverse mortgage’s flexible repayment feature.

Scenario 2 — Sell and Both Buy

Alternatively, the home could be sold with the proceeds split, and then each ex-spouse could use their half of the home equity with a HECM for Purchase (H4P).

An H4P loan allows homebuyers 62 and older to purchase a new primary residence with a down payment of about half of the purchase price** from their funds, with the remainder funded by the H4P loan.

The homebuyer can, and typically does, apply proceeds from selling their current home toward the down payment requirement. By selling the home, each spouse can have half of the equity, which is often enough for both to acquire a similar home with no monthly mortgage payment using an H4P loan (must live in the home and pay the property charges, like taxes, insurance and maintenance). So, it feels like an all-cash payment, except the borrower gets to keep more of their retirement assets to use as they wish.

*This advertisement does not constitute tax and/or financial advice from Fairway. **The required down payment on your new home is determined on a number of factors, including your age (or eligible non-borrowing spouse’s age, if applicable); current interest rates; and the lesser of the home’s appraised value or purchase price.

Elder Care

• A reverse mortgage could help a client maintain their independence, live at home and cover home care and other services

• It can provide more options when helping clients navigate future housing options

• Elder law attorneys can provide a basic overview of the pros and cons of a reverse mortgage and encourage their interested senior clients to speak with a financial advisor

Planning for Long-Term Care (LTC) and Medicaid Issues*

• Pay for long-term care insurance premiums (before needing care)

• Fund the deposit on a nursing home (e.g., the care is needed for one spouse and the other spouse still lives at home)

• Use loan proceeds to pay for LTC in the absence of other planning

• Minimize assets that can be recovered from Medicaid obligations

• Pay attorney fees for LTC planning to prevent future problems

• Credit lines are not countable assets that affect eligibility for Medicaid, SSI or VA benefits

• Private pay LTC during the five-year look-back period

• Converting countable assets to exempt equity

Tax Planning*

• Replace taxable income with reverse mortgage loan proceeds, which are usually non-taxable*

• Letting interest build up before making a payment toward the loan balance so deductions can be bunched together.* This is unlike forward mortgages, which require you to make payments even if there isn’t enough to deduct

• Paying interest the same year as IRA withdrawals are taken out to offset retirement funding income*

• Estate tax planning after death: Pass on a potential tax deduction to heirs to offset the inherited taxable IRAs*

Estate Planning

• Home equity must be part of the planning process

• Can be used to fund attorney fees to do the trusts, wills and advanced directives that are critical in avoiding problems at death (Trusts not eligible in TX)

• Lower lifetime taxable estate by reducing equity value*

• Pay for life insurance policies needed for planning or that are running out*

• Funding probate or estate taxes*

• Lowering home equity below the taxable limit*

*This advertisement does not constitute tax and/or financial advice from Fairway.

Real Estate and Closing

• Advise your client through the legalities of reverse mortgages

• Act as the real estate and/or closing attorney in the transition

• Help non-borrowing spouses, heirs and borrowers understand what the reverse mortgage transaction means for them so there are no surprises later on

Alternative for the Life Estate

Life Estate

• Equity and value of life estate at risk

• More difficult for equity to be used to fund living or health expenses

• When the house is sold, money may or may not be available to seniors depending on children’s wishes, especially with children involved in divorce or litigation

• Depending on the tax structure, the home sale could be taxed with capital gains

• Family not protected from downturns in the housing market. Sometimes need to sell at inappropriate times

Reverse Mortgage

• Equity is not at risk after it’s removed

• Equity is always available in liquid form for planned or emergency needs

• When the house is sold, 100% of the unused equity goes to the heirs

• Step up in basis could be of value if children inherit house after senior dies. No deed transfer on a reverse mortgage

• Guaranteed line of credit gives a predetermined value of equity 30+ years into the future

*This advertisement does not constitute tax and/or financial advice from Fairway.

Foreclosure Protection

• If your client struggles to make payments on a traditional mortgage, a reverse mortgage may be a viable option to help them stave off foreclosure

• A reverse mortgage must be a sustainable solution, and it often is, as a reverse mortgage would allow your client to continue living in their home without a monthly mortgage payment (borrower must still pay property charges, like taxes, insurance and maintenance)

• Note: Reverse mortgage lenders must conduct a financial assessment on prospective borrowers to ensure they are willing and able to pay ongoing critical property charges, like taxes and insurance. While no minimum credit score is required, the lender will look at credit history, property charge history and monthly residual income when deciding whether to approve the prospective borrower’s loan

Bankruptcy and Creditors

• A reverse mortgage loan can be used to shield home equity because up to two liens (one from the lender and one from HUD) are placed on the home after closing*

• If a reverse mortgage is in place before declaring bankruptcy, available funds in a HECM line of credit may be protected from being liquidated

• Some bankruptcy attorneys use a reverse mortgage as part of pre-bankruptcy planning to reduce equity so that the house doesn’t need to be sold

Litigation

• Reverse mortgages can be used to pay medical and attorney costs until a lawsuit can be completed

• Lien and creditor protection with up to two mortgages for 150% of the original appraised value of the house

sold by a person (or entity) who does not have sufficient income to be offset by the deduction.”

Potential Benefits of a Reverse Mortgage Loan for Your Clients

• Pay for medical costs, co-pays, deductibles and costs in the coverage gap (also called a “donut” hole”)

• Pay for home repairs and modifications

• Establish a rainy-day fund

• Close retirement cash flow gaps

• Plan and prepay for funeral and burial plots

• Increase cash flow for lifestyle enhancements (e.g., a vacation with the grandkids)

• Pay long-term care insurance premiums or self-fund long-term care

• Purchase a different home that better suits them in retirement (the borrower can generate the required equity, usually 45%-70% of the purchase price,* by bringing the funds to closing — the H4P loan then funds the remainder of the home purchase)

• Refinance a traditional mortgage to eliminate the burden of fixed monthly payments (must pay property charges, like taxes, insurance and maintenance)

• Donate to charity and gift money to family

“Reverse mortgage loans accrue interest, generally over long periods of time, but the deduction can be lost if the home is

— Barry H. Sacks, Ph.D., J.D.

*The required down payment on your new home is determined on a number of factors, including your age (or eligible non-borrowing spouse’s age, if applicable); current interest rates; and the lesser of the home’s appraised value or purchase price.

Why Fairway

A Reverse Mortgage Partner You Can Trust

1. We offer a variety of loan products, including ones that may provide a fuller, richer quality of life for your senior clients

2. Potential referral partnership

3. The opportunity to work with more senior clients

4. We have specially trained Reverse Mortgage Planners at our offices across the country, allowing us to meet with you and your clients in person or virtually

5. We offer free educational seminars and live stream webinars, books, collateral and tools to help you and your clients better understand the reverse mortgage product

6. Our goal is to act as a trusted advisor, providing highly personalized service. It’s all designed to exceed expectations, guarantee satisfaction and earn trust