Those who are 62 and older who are looking to supplement their retirement income through a reverse mortgage should also consider the implications this decision could have on their eligibility for Medicaid or Supplemental Security Income (SSI).
An important and common factor that Medicaid and SSI share is asset level limits, and depending on which payment route a borrower chooses for a reverse mortgage, the loan proceeds could disrupt eligibility.
When borrowers take out a reverse mortgage loan, they have the option of receiving their home equity through a line of credit, a lump sum, monthly payments, or some combination of these three options.
But for those who are both eligible for and receiving, or are expecting to receive certain government needs-based benefits, the lump sum payment option for reverse mortgage proceeds may not be the best route.
Most needs-based programs consider income and assets when determining whether an individual qualifies for government assistance, and while reverse mortgage proceeds generally don’t qualify as taxable income, the unspent balance from a lump-sum reverse loan could put a borrower’s assets over the limit.
Both Medicaid and SSI consider a recipient’s assets—including money that’s sitting in a bank account, when determining eligibility.
So, for means-tested benefits that are available based on income and assets, reverse mortgage loan advances that are held in the borrower’s bank account may be counted as assets, and thus may disrupt eligibility, according to the Neighborworks HECM counseling Training Manual, which is used nationally by certified reverse mortgage counselors to inform borrowers about the loan and its possible implications.
Borrowers who choose the lump sum option for payment have an especially high risk of losing eligibility for means-tested assistance, as they are more likely to reserve the proceeds from their loan in the bank account. This money is viewed as an asset.
Medicaid is another needs-based program that considers a senior’s income and assets, although limits vary state by state.
In 2019, typical asset limits for Medicaid benefits were $2,000 for an individual and $3,000 for a couple, although some states’ limits are very generous, and other states have no limits at all.
Because of these limits, a Medicaid-eligible senior who receives a lump sum from reverse mortgage proceeds will very likely lose eligibility, according to Neighborworks, unless that money is spent immediately.
Additionally, Medicaid recipients must account for all money that goes in and out of their bank accounts.
Supplemental Security Income (SSI)
SSI, a federal program for the elderly or disabled, requires its participants to have an income beneath the federal poverty level, and also considers assets.
In 2019, the program had a universal asset limit of $2,000 for individuals and $3,000 for couples, so reverse mortgage borrowers who choose the lump sum option would likely become ineligible for SSI assistance.
And, if borrowers received SSI benefits at a time when their asset levels were above the limit, it’s possible that they will be forced to return that money through reductions to their Social Security checks.
A reverse mortgage is a handy tool for increasing cash flow, but it’s important for borrowers to make informed decisions about how they want to receive the proceeds of their loan, especially when considering means-tested benefit programs.
Although a lump sum wouldn’t necessarily rule out Medicaid eligibility for seniors in some states, it will often eliminate necessary qualifications for Supplemental Security Income.
There aren’t any conventional methods for getting around these asset limits, as funds stemming from a loan done through power of attorney would still be attributed to whomever is on the deed of the home.
Reverse mortgage borrowers should look into their state’s requirements and determine how a reverse mortgage will affect their eligibility before deciding which kind of payment they will choose.
Note: Medicaid and SSI are needs based programs not to be confused with public benefits such as Social Security and Medicare. Reverse Mortgage loans have no effect on your public benefits.
Needs Based FAQs
How does a reverse mortgage affect Medicaid?
Medicaid is a “needs-based” program. Having the loan funds available will not affect your Medicaid but having too much money in your account at the end of the month could. We encourage all borrowers to verify their benefits with their financial advisor and then take steps to be sure they do not endanger their benefits (like having excess borrowed funds in their accounts at month end).
Can a reverse mortgage affect Social Security or Medicare?
Social Security and Medicare are not “needs-base” programs and borrowed loan funds will not affect your access to these programs.
What happens to a reverse mortgage when the owner goes into a nursing home?
When the owner of a home with a reverse mortgage permanently leaves the home for any reason, the loan will become due and payable. Borrowers can be gone temporarily for up to 12 months for health reasons before the move is considered permanent. If borrowers or their family become aware that a move will be permanent before the 12-month limitation, they can begin to make arrangement to pay off the loan or sell the home even before that time limit has been met.
Read: Warning: Leaving to Nursing Home? Read This First!
Does Reverse Mortgage count as income?
Reverse mortgage proceeds are borrowed funds and therefore are not considered income. You must talk to your accountant though because any loan proceeds that are borrowed, never repaid and the lender is unable to recoup from the sale of the property could result in a taxable event to the estate. Your accountant would have to advise you what you must do in this instance and for tax purposes.
Can I request a paper check from my reverse mortgage to avoid running proceeds through my bank account?
Borrowers have the option of receiving a direct deposit which is a much faster way to receive their funds but if they so choose, they may have a check written and mailed instead. The check would be made payable to all borrowers on the loan.
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