A reverse mortgage is a specific type of loan for homeowners who are 62 and older. The loan is taken out against the value of a homeowner’s equity – the homeowner converts home equity into cash income. The homeowner receives payments by borrowing against the equity in the home. A reverse mortgage lasts for as long as the borrower occupies the home. (Consumer Financial Protection Bureau) The entire balance of the loan that is the subject of the reverse mortgage is due when the borrower dies, moves away from the home, or sells the home. The home must be maintained and occupied by the borrower until one of these events occurs. (Bankrate)
With a reverse mortgage, the loan amount increases in size over time as the loan gathers interest. As interest grows, the amount of the interest is added to the total balance owed. (US Department of Housing and Urban Development) The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is federally insured. These typically afford mortgagees greater loan advances at a lower total sum than other types. Mortgagees must meet with a counselor before taking out one of these. There are advantages and disadvantages to taking out these loans, including potential for greater cash income, but also outstanding responsibilities. One of the benefits of a reverse mortgage is that, unlike a traditional loan, monthly loan payments by the borrower are not required. Another advantage is that the loan proceeds can be arranged by the borrower as monthly payments, a lump sum disbursed altogether at once, a line of credit, or a combination of these. Loan proceeds from reverse mortgage can be used for almost anything.
Similar to a traditional mortgage, the borrower must pay expenses of the home including property taxes, homeowners insurance, property maintenance, and any needed home repairs. This is in addition to the fees and closing costs associated with the reverse mortgage, which could decrease cash income.
Recently, in a Florida Supreme Court case, WVMF Funding v. Palmero, 46 Fla. L. Weekly S195 (Fla. June 24, 2021), the Court confirmed that foreclosure may proceed against the non-borrowing spouse of a reverse mortgage holder. In this case, Roberto Palmero and his wife, Luisa Palmero, initially applied as co-borrowers for a loan that was to be secured by a reverse mortgage on their primary residence. However, during the loan application process, the Palmeros changed their minds. Mr. Palmero applied for the same type of loan, but without his wife, as the sole borrower. Because Mr. Palmero was the only borrower, he qualified for a higher loan amount than would have been paid had Mrs. Palmero been a co-borrower.
While Mrs. Palmero and her husband both executed the mortgage document, one of the five documents related to the reverse mortgage loan, and that mortgage document listed Mrs. Palmero as a borrower, the same was not true of the other loan documents, including the promissory note. Importantly, Mr. Palmero was listed as the sole borrower on the note, and Mrs. Palmero was listed as a non-borrower spouse.
Following Mr. Palmero’s death, when his estate did not repay the loan, the lender sought to foreclose the mortgage – because, Mr. Palermo, the borrower as stated on the note, was no longer in the home. Mrs. Palmero defended against the foreclosure by arguing that she continued to reside in the mortgaged property and was a co-borrower under the mortgage.
Florida’s Third District Court of Appeal had previously sided with Mrs. Palmero, using recent cases to support her position as a borrower. The Supreme Court overruled the Court of Appeals’ decision using the older, traditional rule that the loan note takes priority over the mortgage. In a divided opinion, the Court ruled that Mrs. Palmero was not a co-borrower paving the way for the lender to foreclose the loan.
If it is important that one of the spouses remain in the home in the event of the other spouse’s death, the borrowers should design the terms of the reverse mortgage to allow the other spouse to stay in the home. As of August 4, 2014, deferral provisions can be made for a non-borrowing spouse at application. If you are considering a reverse mortgage or applied for a reverse mortgage on or after August 4, 2014, special deferral provisions may be available for your non-borrowing spouse. The Federal Housing Administration provides an overview of the issues arising from the death of the reverse mortgage borrower, and the impacts on a nonborrowing spouse, the heirs, or estate. More information is available here.
As a result of the precedent set by the Palmero case, prospective borrowers of a reverse mortgage must carefully consider the consequences of one spouse’s passing. This decision affirmed older rules of interpreting contracts and likened reverse mortgages to traditional mortgages. It could impact older reverse mortgages.
Spouses should exercise caution so that each document associated with a reverse mortgage expresses their intent accurately and when negotiating a reverse mortgage; it is important to consider the risk of foreclosure and to make a plan that protects the borrowers from it. This plan can include deferral provisions which stipulate that the non-borrowing spouse may remain in the home if all conditions of the reverse mortgage continue to be fulfilled.