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How A Reverse Mortgage Loan Works In Divorce

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Divorce can be emotionally stressful enough for everybody involved without the added worry of what’s going to happen with their finances. Often, one of the first questions asked is what is going to happen with their current home or where they are going to live. When splitting up the assets, one of the hardest decisions is what are you going to do with the house.

With both parties being faced with going from a dual income to a single income, additional financial tension is created. Even though one spouse may want to keep living in the house, the ex-spouse may not qualify to purchase another residence without refinancing the current home. Selling the house is usually one of the first options people think of. This way, it’s easier to divide assets and prevent having to deal with any of the following mortgage issues.    

  • Staying tied to the current mortgage with the ex-spouse
  • Ex-Spouse missing payments with both names on the mortgage
  • Affecting your debt to income (DTI) ratio’s as your name is still on the mortgage
  • Signing a Quitclaim Deed doesn’t waive your mortgage responsibilities

If you are 62 years or older, you have an additional solution.

 A reverse mortgage loan can provide between 30-70% cash-out to the borrower.  The funds can be used to buy out an ex-spouse in a divorce settlement or a partner that wants out of a real estate or business partnership. Many people may not qualify for a mortgage in retirement, and if they do, they would prefer not to have a mortgage payment. HECMs are a way in which cash can be borrowed with minimal income and credit requirements without incurring a mortgage payment, although they are still required to pay property taxes, insurance, and maintenance.

Example 1:

Joseph and Margaret* are both 79 and planning to get a divorce. Margaret would like Joseph to sell their house to get enough cash out of the separation to purchase another home. Neither wants a mortgage payment from losing the other’s income.   They currently have a $600,000 paid off house. Joseph plans to continue to live in his current home while Margaret intends to move into a new home.

A reverse mortgage would allow Joseph to continue to live in his current $600,000 home and Margaret to purchase a new $600,000 home.

Joseph Does A Cash-Out Refinance With A Reverse Mortgage And Takes Out $300,000 For Margaret.

Norm has no monthly mortgage payments; he must still pay taxes and insurance and maintain the home.

Margaret Uses $300,000 To Do A Reverse Mortgage For Purchase On Her New $600,000 Home.

Margaret has no monthly mortgage payments; she must still pay taxes and insurance and maintain the home.

Example 2

Larry and Betty* have a paid off $400,000 home and are both 82 years old currently divorcing.   Larry would like to purchase the house but is not able to take the cash out that is needed to pay off his soon to be ex-wife with traditional financing. Betty would like to be able to move into an active senior community with the proceeds from the divorce.

Larry Decides To Do A Reverse Mortgage And Obtains A Lump Sum Of $200,000 To Pay Off Betty.

Larry has no monthly mortgage payments; he must still pay taxes and insurance and maintain the home.

Betty Uses The $200,000 To Purchase A $400,000 Home In An Active Senior Community.

Betty has no monthly mortgage payments; she must still pay taxes and insurance and maintain the home.

 Key Reverse Mortgage Divorce Details:

  • Reverse mortgages have limited requirements for any sale or refinance to take place
  • A reverse mortgage may be done before the divorce is finalized (restrictions may apply)**
  • Both parties have no monthly mortgage payments; they each must still pay taxes and insurance, and maintain the home
  • Both parties can now stay in an equal value home without pulling cash from other sources (if there is money owed on the current home, there will be less equity to split up.)

If you are going through a divorce and looking for mortgage loan options, it could be to time to consider a reverse mortgage loan. 

 

 *NOTE: Story is for illustration purposes only. The persons depicted herein are fictional, and any resemblance to actual persons is a coincidence. This information is provided as a guideline; the actual reverse mortgage available funds are based on current interest rates, current charges associated with the loan, borrower date of birth, the property sales price and standard closing costs. Interest rates and loan fees are subject to change without notice. **Information provided is not legal advice; clients should consult an attorney for their specific situation.

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