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If a Spouse is Under 62, Know the HECM Non-Borrowing Spouse Rules

When a spouse is not a borrower in a HECM transaction, he or she is referred to as a non-borrowing spouse (NBS). This is often due to the spouse not meeting the age requirement of 62.  Understanding Reverse – 2018 – Page 49

The Basics

A Non-Borrowing Spouse (NBS) is the spouse of a reverse mortgage borrower who will not be a borrower on the loan. But the guidelines, as well as the rationale for this designation, are more complex, and are commonly misunderstood.

Many spouses are not included in reverse mortgages because they are not old enough (age 62). However, there are other reasons for an NBS, including pre-nuptial agreements, homeowners who have been remarried and want biological children to inherit the estate, legal liability, and homeowners who don’t intend to stay married, etc.

Until 2014, all reverse mortgage loans automatically became due and payable when the last borrower died, even if a surviving spouse was still living in the home. This is no longer the case. HUD changed the guidelines so that “Qualified Non-Borrowing Spouses” may continue living in their homes following the death of the last borrower. In essence, the “due and payable” status of the mortgage could be deferred if the spouse is qualified, meaning that:

  1. The Non-Borrowing Spouse is married at the time of application and continues to be married to the borrower over the life of the loan, and
  2. The Non-Borrowing Spouse occupies the home and continues to occupy the home for the life of the loan.

Having an NBS, however, now meant the borrower would have access to less funds. This was because the funds became based on the age of the youngest spouse, which was likely the NBS.

The Designations

Lenders argued that if an NBS does not occupy the home, and is therefore not qualified for the deferral, his or her age shouldn’t be used in the calculation of the borrower’s principal limit. As a result, HUD issued new designations – Ineligible and Eligible Non-Borrowing Spouses:

  • INELIGIBLE Non-Borrowing Spouses do not occupy the home, are not protected by the NBS “due and payable” deferral provisions, and do not have their age included in the calculation of the borrower’s principal limit.
  • ELIGIBLE Non-Borrowing Spouses occupy the home, are protected by the NBS “due and payable” deferral provisions, and have their age included in the calculation of the borrower’s principal limit.

It is important to know that because an NBS has only limited protection under the reverse mortgage program, we would prefer to have both spouses on the loan if possible.

The Due and Payable Deferral Period

If the last borrower passes away, it will be imperative that the NBS “obtain ownership of the property or other legal right to remain in the property” within 90 days.

Fortunately, HUD made additional regulatory changes in 2017 that allow an NBS to remain on title as a mortgagor. While they are still not borrowers, this does eliminate the 90 day hurdle, making it easier to qualify for the deferral.

At that point, the NBS will need to make sure to keep up with all of the obliga­tions of the HECM, including the payment of property charges, to ensure the loan does not become due and payable for other reasons.

Warnings!

  1. Because the NBS is not a borrower, or party to the loan in any way, no disbursements can be made during the deferral period other than repairs charges paid through a repair set-aside. This means that the line-of-credit and monthly payments will cease payouts, including a Life Expectancy Set-Aside (LESA) used to pay property charges.
  2. The due and payable deferral is only available upon the death of the last borrower. Therefore, if the loan matures for any other reason, the NBS is not eligible for the deferral. The primary concern is that 12 consecutive months of non-occupancy for mental or physical incapacity (e.g. nursing home/assisted living) is a maturity event that is ineligible for the due and payable deferral.
  3. These protections only apply to HECM loans with FHA Case numbers assigned on, or after, August 4, 2014. For loans originated prior to that date, the lender has the option, but not the obligation, to assign the loan to HUD, which may offer similar protection to the NBS.

For more information on reverse mortgage guidelines, please purchase the book Understanding Reverse, and subscribe to my blog in the upper right corner of this page.

Dan Hultquist