How a Reverse Mortgage Might Help In Certain Divorce Scenarios

How a Reverse Mortgage Might Help In Certain Divorce Scenarios

When most people currently think of a reverse mortgage, they have some degree of anguish. I would like to be the first to tell you that will soon change. I believe this because in the relatively short time I have been studying and recommending reverse mortgages, I have seen more and more economists and financial professionals¹ come to understand that the new reverse mortgage, the “Home Equity Conversion Mortgage” (or, HECM) offered by the U.S. Department of Housing and Urban Development (HUD) and provided through the Federal Housing Administration (FHA), is not the big, bad reverse mortgage of yesteryear. Couple that with the numerous, mostly-positive changes² made to the HECM by HUD/FHA in that same relatively short time frame, and I feel pretty confident with my prediction.

I tell you this, because if you do not understand this part, you have no reason to read the rest of this article. I hope you will.

In brief, a HECM is:

  • A loan on one’s home;
  • Only available to homeowners 62-and-better;
  • Requires no repayment of the principal and interest until the last borrower has left the home³; and,
  • A source of funds calculated by multiplying the home’s appraised value times a certain percentage (based, in simple terms, on the age of the youngest borrower and expected interest rates), less any amounts currently owed on the home.

As hinted at in the title, there are various scenarios where a HECM can help divorcing spouses in negotiating a settlement and provide a means for buying a new home, when desired. The first scenario comes into play when one spouse wishes to stay in the current residence and needs funds to accomplish that goal. Many times that spouse does not have sufficient income, or may have credit issues, etc., which prevent them from qualifying for a regular, “forward” mortgage, yet they may still qualify for a HECM.

For example – The spouse wishing to stay in the home is 66 years old; the home is appraised at $350,000; and, there is $60,000 owed on it. The $350,000 value multiplied by, in this example, a “certain percentage” of .548 (think of it as the Loan-to-Value amount for a forward mortgage, but based on the borrower’s age of 66) = $191,800; reduce this by the $60,000 owed and net closing costs of $5,000⁴; and, this leaves $126,800 for divorce settlement purposes or any other financial need.

The second scenario can help the “departing” spouse purchase a new primary residence, if desired.

For example – The spouse wishing to buy a new home is also 66 years old and the new home’s purchase price is $300,000. Multiply the purchase price of $300,000 by that same “certain percentage” of .548  =  $164,400 of HECM proceeds available for a down payment. The remaining $135,600 of the purchase price, plus closing costs, would need to come from other sources, such as settlement proceeds, savings, etc.

In each of these scenarios, the borrower ends up accomplishing their desired goal, while living in the home for as long as they desire with no monthly principal and interest payments due.

As noted, there is a great deal more to be discussed than can be addressed in this, or any, short article.⁵ Please contact me at Bill.Parker@WVMB.com; 480-905-6702 or billparker.wvmbscottsdale.com if you wish to discuss further.

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¹ Sacks, Barry H. and Stephen R. Sacks. 2012. “Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income” Journal of Financial Planning 25 (2): 43-52.

Wagner, Gerald C. 2013. “The 6.0 Percent Rule” Journal of Financial Planning 26 (12): 46-54.

Go to www.billparker.wvmbscottsdale.com for additional resources

² Feel free to contact Bill to discuss these recent changes.

³ The homeowners remain responsible for the payment of real estate taxes, homeowners and flood insurance, HOA dues, etc.

⁴ Based on interest rates, closing costs and a reasonable broker credit, as of July 13, 2016.

⁵ This is not a commitment to lend or extend credit. Restrictions may apply. All loans are subject to credit approval. These materials are not from HUD or a government agency. Nor is the company acting on behalf of or at the direction of any government agency.

The HECM is a very complex financial product, with numerous benefits and risks involved. As with any loan product, there are tax and legal issues involved, so please seek your own tax and legal counsel before making a decision, if desired.

Article published by Bill Parker