The rights and responsibilities of non-borrowing spouses
There times when a HECM loan is needed and one of the spouses is under age 62. This situation could create a very risky situation for the younger spouse. In the past that person would be taken off the title to the property, and the HECM loan was made in the name of the age-qualifying older spouse. The problem arose when the older spouse passed on. Then the home was not in the name of the younger spouse so in some cases there were costly probate proceedings to get the title changed. Also there was a mortgage on the property that had to be paid off if the younger spouse wanted to keep the home. Often that was impossible for the younger spouse to do — either there wasn’t not enough money, or the younger spouse could not qualify for a refinance loan. For some younger spouses, this left them with little money and no home.
New regulations for 2014 give a younger spouse protection from losing a place to live.
HUD recently released new regulations which now allow younger non-borrowing spouses, under the age of 62, to remain in their home. The Home Equity Conversation Mortgage or HECM program still only allows the loans to be in the name of borrowers 62 or older. However, the new regulations gives the non-borrowing spouse the right to remain in the home indefinitely during what is termed as a ‘deferral period’ provided all requirements are met. HUD has accomplished this by providing loan amount tables for ages below 62. The amount the couple qualifies for is based on the younger spouse’s age, even though the younger spouse may not be on the loan or title. Note: I recommend that, in California, the couple see an attorney about holding title in a “Living Trust” so that, if the older spouse passes on first, the title will transfer without the need of a probate proceeding.
Here are the key points you should know to understand the benefits and risks for the younger spouse.
First- Non-borrowing spouses are on a very short leash. Within 90 days of the borrower passing the surviving spouse must transfer the property into their name establishing legal ownership. If this deadline is not met the loan will be called due and payable.
Second- The non-borrowing spouse must meet the ongoing obligations of the HECM loan such as maintaining the property and keeping homeowners insurance, property taxes and association dues current.
Third- And perhaps most important: the HECM loan is not assumable. This means the non-borrowing spouse has the right to remain in the property, however they no longer have access to the remaining line of credit or previous tenure payments. They will not be able to take any more money out of the HECM loan as the older spouse would have been able to do. This could be a problem for households which depended upon the cash flow from monthly tenure payments or periodic line of credit draws. At this time it is unclear what the responsibilities are for lenders who become aware of the impending death of the primary borrower. One could argue the borrower should withdraw all available funds from the line of credit or modify the payment plan from tenure to a line of credit and withdraw all funds before they are frozen.
Fourth- Borrowers with non-borrowing spouses will need to complete an annual certification form attesting that there is, at the time of the completion of the form, a non-borrowing spouse living in the home. Further, upon the death of the borrower, the non-borrowing spouse must complete the certification form within 30 days of receiving notice of the borrower’s death attesting that she/he is a surviving spouse and living in the home as a primary residence.
Fifth- In the event the surviving borrower divorces the non-borrowing spouse, the younger then ex-spouse is no longer eligible for the deferral period. Also if the surviving borrower remarries, the new spouse, no matter what age, is not eligible for the deferral period protection since they were not married to the borrower at the time the loan was taken.
Sixth- HECM counseling will cover the nuances for non-borrowing spouses informing them of their rights and responsibilities.
Seventh – Interest continues to accrue, as does the ongoing mortgage insurance premium charges, during the ‘deferral period’ while the younger spouse occupies the home. The loan is due when the younger non-borrowing spouse permanently leaves the home or if the any of the other requirements of the loan are not met.
Refer to HUD Mortgagee Letter 2014-07 for complete, detailed information.
Information from an article by Shannon Hicks, ReverseFocus.com, July, 2014