“When a spouse is not included in a HECM (Reverse Mortgage) transaction, they are referred to as a non-borrowing spouse (NBS). This is often due to the spouse not meeting the age requirement.”
– Understanding Reverse
I recently had a conference call with a borrower and another reverse mortgage lender. The borrower wanted me to clarify guidelines for the competing loan officer – which I was willing to do. The loan officer’s confusion revolved around non-borrowing spouse guidelines.
In a simple sense, a non-borrowing spouse (NBS) is the spouse of a reverse mortgage borrower that will not be on the loan. But the guidelines are actually not that simple, and are commonly misunderstood. Let’s see if I can explain the rules, and why they were created.
Some spouses are not included in the reverse mortgage. In most cases this is because they are not old enough (Age 62). However, there are other reasons – homeowners with pre-nup agreements, or homeowners who have been remarried and want biological children to inherit the estate, homeowners who don’t intend to stay married, etc. Some states and lenders may have additional guidelines called “overlays” that may also come into play here.
Regardless, these non-borrowing spouses have historically NOT been protected after the death of the last borrower. If the last borrower died, the loan became due and payable…. even if a surviving spouse was still living in the home. This is no longer the case.
The Solution – ML 2014-07:
FHA changed the guidelines with Mortgagee Letter 2014-07 so that “Qualified Non-Borrowing Spouses” may continue living in their home following the death of the last borrower. The “due and payable” status of the mortgage could be deferred if the spouse is “Qualified”, meaning that:
- 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
- The Non-Borrowing Spouse occupies the home and continues to occupy the home for the life of the loan.
This created another issue: Having an NBS generally meant the borrower would have access to less funds. This was because the borrower’s available funds became based on the youngest age, which was likely the non-borrowing spouse’s age. This was true whether the NBS was qualified for the deferment or not.
The Clarification – ML 2015-02:
Some lenders argued that if an NBS is “NOT qualified”, they shouldn’t be required to use the age of the NBS in the calculation of the borrower’s Principal Limit. As a result, FHA issued Mortgagee Letter 2015-02 to create new designations – Ineligible and Eligible Non-Borrowing Spouses.
An INELIGIBLE Non-Borrowing Spouse:
- Does not occupy the home,
- Is not protected by the NBS “due and payable” deferral provisions, and
- Does not have their age included in the calculation of the borrower’s principal limit
An ELIGIBLE Non-Borrowing Spouse:
- Occupies the home
- May be protected by the NBS “due and payable” deferral provisions, and
- Has their age included in the calculation of the borrower’s principal limit
It is important to know that an NBS has limited protection under the reverse mortgage program. Therefore, we would prefer to have both parties involved, and not have an NBS. If they are under 62, we have no choice. However, FHA does NOT prohibit removing an older spouse from the loan and making them an ELIGIBLE NBS when a homeowner has a viable reason. The guidelines do, however, prohibit making the NBS ineligible so that the borrower qualifies for higher principal limits.
Rapid changes to improve the reverse mortgage program left many homeowners and some lenders confused about guidelines. I don’t mind fielding these questions, because the answers ultimately end up in my blogs, articles, and training documents. As a result, we will all have a better understanding of this great program.
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.