Can health problems prevent you from getting a reverse mortgage?
Some people may find it difficult to qualify for a traditional mortgage if they have health problems that keep them from holding a steady job. With a reverse mortgage, there are no income requirements (in fact, many senior citizens choose to borrow with reverse loans to help pay for medical costs). However, your medical condition is a huge consideration in the decision to get a reverse mortgage. Here's why.
Reverse mortgage qualifying is as easy as breathing
One of the reasons reverse mortgages appeal to retirees is that there is no income qualification. You don't need good credit either, because you don't have to make payments to the lender -- the lender makes payments to you. As long as you are 62 or older and have a large amount of home equity or own the property free and clear, you can apply for a reverse mortgage.
Of course you can pay for medical care...
You can receive your reverse mortgage proceeds as a lump sum, monthly payments for a specified number of years (term), monthly payments for life (tenure), a line of credit, or some combination of these choices. Once you have your funds, you can spend them on whatever you like, including medical costs such as hospitalization or in-home care. Or you may buy a long-term care insurance policy or even pay for life insurance. You could also remodel your home for greater accessibility, adding ramps, handrails, hydrotherapy pools or other amenities to improve your qualify of life.
But here's one big, fat cautionary note
One absolute requirement of a reverse mortgage is that you reside in the home. Once you stop living in the home, the loan becomes due and payable (this is called an acceleration clause). More than a few borrowers have returned from a worldwide jaunt or a stint in a long-term care facility to find themselves in foreclosure.
So, what exactly does "residing in the home being financed" mean for the purposes of reverse mortgage qualifying? HUD's documents for the FHA Home Equity Conversion Mortgage (HECM), which is the most common reverse mortgage, states:
"Principal Residence means the dwelling where the Borrower shall maintain his or her permanent place of abode, and typically spends the majority of the calendar year. A person may have only one principal residence at any one time. The Property shall be considered to be the Principal Residence of any Borrower who is temporarily or permanently in a health care institution as long as the Property is the Principal Residence of at least one other Borrower who is not in a health care institution."
According to the Office of Thrift Supervision, "vacating" property for the purposes of terminating your HECM means not residing in the home for 12 months. If you're a married couple, you're both obligated by the mortgage. If one of you needs residential nursing or rehabilitation care, the loan remains in force as long as the other spouse lives in the home. If you're single, however, once you're out of the home for 12 months, your HECM loan must be repaid.
With proprietary reverse mortgages, those not backed by HUD, the mortgage lender may have different rules. Some define "vacating" as leaving your home for as little as 60 days. With proprietary reverse mortgages, you don't have the same safeguards that you would with HECM loans. Consult a reverse mortgage counselor if you have any qualms about your understanding of your reverse mortgage disclosures.
And another cautionary note
To be eligible for the HECM loan, all borrowers must be at least 62 years old, and the amount that can be borrowed is determined in part by the age of the youngest borrower. These provisions have led some married couples to remove the youngest spouse from the home's title so that they can take out a reverse mortgage or receive a bigger payout.
However, if you, the person with the health problems, is the one remaining on the home's title and obligated by the HECM, your spouse could end up homeless if you need residential nursing care or if you pass away, because your absence may trigger the acceleration clause of the reverse loan.
Finally, your health problems won't keep you from getting a reverse mortgage, but they could keep you from making good use of it. Reverse mortgage costs are quite high because they are based on the property value rather than the mortgage amount, and because they are largely paid upfront. The longer you receive your monthly installments, the more those costs are spread out, and the smaller they become relative to your loan amount. But if you terminate your mortgage in two or three years, you could end up paying a great deal of money for a minimal benefit, an additional concern with getting a reverse loan when your health is questionable.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.