Attorneys

What Is a Reverse Mortgage Loan?

Most reverse mortgage loans today are federally insured through the Federal Housing Administration’s (FHA’s) Home Equity Conversion Mortgage (HECM) program, which is a non-recourse mortgage loan for homeowners 62 and older. It converts about 30%-70% of a client’s equity into cash based on the age of the youngest borrower.

The borrower never gives up ownership or control of the home, any mortgage balance is paid off and any remaining loan proceeds are usually tax-free.* No monthly payments are required except for taxes, insurance and maintenance. If the mortgage balance exceeds the value of the home, FHA mortgage insurance protects the homeowner and their heirs.

With a reverse mortgage loan, the property, not the borrower, is responsible for paying off the loan. The borrower signs a release of personal liability at closing.

Reverse Mortgage Loans at a Glance

The heirs of the estate will have six months to decide how they want to proceed with the property. They will have the option to request up to two 90-day extensions for additional time as long as they are showing progress is being made. Assuming the house goes to the heirs, they have four options:

1. Purchase the home for 95% of the appraised value

2. Refinance or pay off the remaining balance of the loan

3. Sell the house and keep the proceeds after paying off the loan

4. Walk away if they choose not to purchase the home

(FHA mortgage insurance will pay any shortfall as long as they continue to meet the loan guidelines)

Reverse Mortgage Legal Specific Issues

Up to two mortgages for 150% of the original appraised value of the house from lien and creditor protection

Deed never changes hands until the borrower moves out or passes away

Can use revocable or irrevocable trust with addendums

Potential Benefits to Your Clients

Increased Cash Flow

Tenure payments never run out! Credit lines cannot be closed.

Increased Portfolio Longevity*

Decreased Income Taxes*

Increase in Net Worth and Legacy for Heirs*

Ability to Fund Needed Legal Work

Life Estate

Equity and value of life estate at risk

More difficult for equity to be used to fund living or health expenses

When the house is sold, money may or may not be available to the senior depending on their children’s wishes, especially with their children involved in divorce or litigation

Depending on the tax structure, the sale of the home could be taxed with capital gains

Family isn’t protected from downturns in the housing market. Sometimes need to sell at inappropriate times

Reverse Mortgage

Equity not at risk after it is removed

Equity always available in liquid form for planned or emergency needs

When the house is sold, 100% of the unused equity goes to heirs

Step up in basis could be of value if children inherit house after senior dies. No deed transfer on a reverse mortgage

Guaranteed credit line gives a predetermined value of equity 30+ years into the future

Planning for Long-Term Care (LTC) and Medicaid Issues

Pay for LTC insurance premiums
Minimize assets that can be recovered from Medicaid obligations
Use loan proceeds to pay for LTC in the absence of other planning
Pay attorney fees for LTC planning to prevent future problems
Credit lines are not accountable assets that affect eligibility for Medicaid, SSI or VA Benefits
Private pay LTC during the five-year look back period
Convert countable assets to exempt equity

Estate Planning*

Home equity must be part of the planning process. Currently, there is nearly $13 trillion of equity trapped in the homes of seniors 62 or older**
Can be used to fund attorney fees to do the trusts, wills and advanced directives that are so critical in avoiding problems at death
Lower lifetime taxable estate by reducing equity value
Pay for life insurance policies needed for planning or that are running out
Fund probate or estate taxes
Lower home equity below the taxable limit

Accredited Veterans Options

Fund pre-application eligibility planning
Fund private pay during the waiting period for VA loan approval
Give veterans needed cash flow during the waiting phase
Avoid one-year ineligibility because of selling the home

Tax Planning*

Replace taxable income with reverse mortgage loan proceeds which are usually non-taxable*
Let interest build up so deductions can be bunched together, unlike a traditional mortgage which requires you to make payments even if there is not enough to deduct*
Paying interest the same year as IRA withdrawals are taken out to offset retirement funding income*
Estate tax planning after death: Pass on a potential tax deduction to heirs to offset the inherited taxable IRAs ***

Shield Home Equity

Use a HECM to pay off current mortgages, not mandatory obligations.* A reverse mortgage can be used to protect and shield equity because of two mortgage liens placed on the home after a reverse mortgage is in place, even if money is not drawn and only a growing line of credit is put in place.

Use as an additional asset when a client should not draw from IRAs and other retirement funds because of tax purposes. In Bankruptcy and Foreclosure situations, sometimes a reverse mortgage will protect equity and allow borrowers to convert equity to cash.

Some bankruptcy attorneys use a reverse mortgage loans as part of pre-bankruptcy planning to reduce equity so that the house does not need to be sold. Reverse mortgage loans accrue interest, generally over long periods of time, but the deduction can be lost if the home is sold by a person (or entity) who does not have sufficient income to be offset by the deduction.***

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