You may have heard about the ways in which a reverse mortgage can help improve your financial situation by allowing you to withdraw the equity in your home over time.
For those people meeting the 62-year-old age requirement who have substantial equity in their homes, this can be a means to expand monthly cash flow or eliminate mortgage payments by paying off an existing mortgage through a federally insured loan.
However, there is another important time when a reverse mortgage can be a helpful tool: in a divorce.
While taking charge of which spouse will keep which assets, a reverse mortgage may be able to relieve some of the financial burden on each spouse while allowing them to live separately.
Reverse mortgages and living separately.
Many couples who separate later in life find themselves unable to support the costs of a home once supported by two partners now that they are independently responsible.
Here is where a reverse mortgage can come into play…
The loan allows for you to choose how you withdraw the equity in the home, whether as a lump sum, a series of ongoing payments or a combination.
If one spouse prefers to remain in the home but cannot meet the monthly mortgage payments, a reverse mortgage can be used to pay off the mortgage, with any remaining proceeds going to the moving spouse.
Say you have a $300,000 home with an $80,000 mortgage balance at age 72.
You may be able to borrow a little more than $200,000, with $80,000 going to pay off the existing mortgage and the remaining $120,000 to be used however you choose.
You can even wire the funds to the moving spouse at closing.
You will have to remove the moving spouse from the home title, which can take place during the loan.
This will allow one spouse to keep the home, payment free, while the other can keep the remaining cash.
As with any reverse mortgage, the loan becomes due when the borrower moves from the home or passes away.
He or she must continue to pay property taxes and homeowners insurance over the life of the loan.
Reverse Mortgage for Purchase
A relatively new type of reverse mortgage may also be a useful solution for a divorcing couple.
If neither spouse wishes to remain in the home, a reverse mortgage purchase loan allows a homeowner to purchase a new home while taking out a reverse mortgage in a single transaction.
In the same way a standard reverse mortgage can help, this may enable one spouse to move to a new home through the reverse mortgage while the other can assume some of the remaining cash proceeds.
This might work particularly well in the case where the borrower is downsizing.
If you get divorced and already have a reverse mortgage…
In the case where a couple who has a reverse mortgage together decides to get a divorce, they must submit the divorce decree to the loan servicer.
At that point, one of the spouses will be permitted to be removed from the home title, keeping the loan in the remaining spouse’s name.
What happens to a reverse mortgage in a divorce?
If a married couple has a reverse mortgage and they go through a divorce, there can be many different outcomes depending on how the reverse mortgage was set up and what the plans are for the residence.
For example, if both spouses were borrowers on the loan and one of them is going to stay in the home after the divorce and the other is going to move out, the loan is still in good standing because one of the original borrowers is still living in the home as their primary residence. If only one of the spouses was a borrower on the reverse mortgage loan and that is the spouse who will be moving out of the property after the divorce, the reverse mortgage will need to be paid off either by refinance or by selling the home.
Can a reverse mortgage be taken to fund/settle divorce payout?
Yes. The spouse who wishes to remain in the property can apply for a reverse mortgage and use the available proceeds to pay the other spouse to complete the divorce settlement. To accomplish this, there must a written agreement filed with the court outlining the terms.
How does my existing reverse mortgage affect my new spouse?
If a homeowner obtained a reverse mortgage prior to a new marriage, the new spouse was not factored into the terms of that loan. Therefore, the spouse does not have any spousal protection or deferral period to remain in the home with the reverse mortgage in place if the borrowing spouse were to pass away first. The only way to protect a new spouse is if you do a refinance of your reverse mortgage to a new one with the new spouse included in the terms.
Will a divorce cause my reverse mortgage loan to be called due and payable?
Not necessarily. If you were a borrower on the reverse mortgage and you stay living in the property as your primary residence, your loan will not be called due and payable. If you were not a borrower on that loan and you are the one who wishes to stay in the home, you will need to pay off the reverse mortgage loan or it will be called due and payable after the borrowing spouse no longer occupies the property as their primary residence.
If I divorce can I get a new reverse mortgage of my own?
Yes. To be eligible to get your own reverse mortgage after the divorce you will need to be able to supply your divorce decree finalized with the court. The agreement will have to have specifically awarded the property to your ex-spouse and named them as the individual solely responsible for that reverse mortgage. Without this documentation, you cannot get a new reverse mortgage of your own.
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