Managing finances is an important piece of your care plan.
Keeping Mom in her home for as long as possible is the foundation of her care plan. You see, the good news is mom is in relatively good health for 86, the flip side? She will most likely outlive her money.
Figuring out finances meant looking for ways to ensure enough monthly income to pay for upkeep on a 60-year-old home, taxes, homeowners insurance, living expenses AND caregiving. Two additional income streams: VA Aid and Attendant Benefits and a reverse mortgage are the ones we decided to pursue. (Jump to Lessons Learned)
Even with additional VA money, we would not have enough monthly income to ensure mom could stay at home with a caregiver. We considered taking out a line of credit or buying the home outright. But mom was unlikely to quality for a line of credit due to income considerations. If she did qualify, repayment would begin immediately, eating into money we would need in the long run. We discussed buying the home from mom, but I was in jeopardy of losing my job and could not take on additional financial debt. Which left me exploring reverse mortgages.
When the HUD/FHA Home Equity Conversion Mortgage (HECM) or “reverse mortgage” federal program came into being in the 1980’s, there was considerable regulation, but there were both private reverse mortgages from insurance companies that were predatory and there were some bad actors within the HECM business. When the economy changed in the early 2000’s, the reputation of these tools was tarnished. Overseen by HUD/FHA, there are now tight rules, regulations and many consumer safe guards are in place. All of which made a reverse mortgage the best financial tool for us.
To qualify for a reverse mortgage:
- You must be 62 or older, you may have a younger spouse/partner.
- The mortgage is only available on your primary residence.
- You will be required to first pay off any liens on the property. You can use the initial proceeds of the reverse mortgage to pay off these liens.
- You are required to go through a financial assessment that proves you have sufficient income, assets or proceeds from the reverse mortgage to cover expenses. In addition, you record of on-time payments of property taxes, mortgages, etc. will be reviewed.
- If your income is not sufficient, some or all the reverse mortgage money proceeds will be “set aside” in escrow to pay for future taxes.
Strengths of Reverse Mortgages:
- You continue to own the home.
- If you use up all the money in the reverse mortgage loan you are not forced to sell your home.
- You will never owe more on the loan than the fair market value of the home. FHA imposes a mandatory mortgage insurance that will cover the difference if more is owed than the market value.
- Borrowers aren’t personally responsible for the loan. The liability rests on the property. These are “non-recourse” loans. As such, the mortgage can be under water and even if the borrower has funds, the lender has no recourse against the borrower.
- Heirs are not responsible for their parent’s loan. Heirs can purchase the family home outright or use a normal mortgage. If children don’t want to purchase the home, the equity will go to the estate.
- Reverse mortgage proceeds are not considered income, so it does not interfere with Social Security or most other means tested benefits.
- If you are on disability or Medicaid you can still have a reverse mortgage. You need to ensure that any moneys taken out within a month is spent down to the federal required limits.
This financial tool is not meant to be a “loan of last resort”. People that run up huge credit card bills may find it more difficult to get a reverse mortgage.
Who writes reverse mortgages?
Banks, mortgage companies and reverse mortgage specialists can write a reverse mortgage. There can be benefits to shopping around for the best lender to use. You may find better rates, service and flexibility after doing some research.
If it sounds like a reverse mortgage is a financial tool that can help, then find a lender to get into the nitty gritty details with you. This includes:
- Deciding on how to receive the money: monthly payment, lump sum upfront, line of credit, or a combination.
- There may be “set asides” of things like property taxes attached to the loan.
- What are charges for the loan? The Mortgage Insurance Premium (MIP) is charged by all lenders. It protects the lender from loss and protects the borrower from owing more than the fair market value for the home.
- Since you continue to own the home, you must maintain it and pay taxes on it.
- To get a reverse mortgage on a condominium, the development must be HUD approved.
- There is a non-refundable fee for the HUD/FHA counseling session. You can do it over the phone. But I would schedule it for when someone else is there. In our case, Mom could not hear some of the questions. I would take the phone, repeat the question and hand the phone back to her.
- People don’t lose their home because of the reverse mortgage. People lose their homes because they fail to pay property taxes, HOA fees, home owner’s insurance or they fail to maintain the residence.
- Find someone you trust, even though safe guards that have been put in place are followed by everyone, flexibility for your situation may be needed.
- Keep in mind that staying in the home may cut off the option of 2 years private pay many Assisted Living facilities require. Without the money for private pay, you can expect to go directly to a Medicaid bed.
- Look for an institution that takes a financial planner approach, that can advise you how to maintain living in your home by making the money last. The bank or lender should subscribe to and adhere to the National Reverse Mortgage Lenders Association Code of Ethics.
Note: VA Aid and Attendant Benefits is a pension benefit open to veterans or their surviving spouses. It is used to help pay for care in the home, nursing home or assisted living facility. For more information and help on how to apply, you can contact an elder law attorney or use the organization we did: Patriot Angels.
With thanks to my collaboration partners.
Disclaimer: The material in this blog is for educational purposes only. It is not intended to replace, nor does it replace, consulting with a physician, lawyer, accountant, financial planner or other qualified professional.