Senior citizen married couples, who want to divorce, may not think they can afford to divorce. Often times, one spouse wants to stay in the property, but cannot qualify for a cash out refinance loan to buy out the departing spouse due to a lack of income when attempting to qualify for a loan. In some case’s both parties will walk away with a chunk of funds from the sale of the property, but not enough to buy their own home leaving them with options that include moving in with one of their children or renting which is why the divorce may not move forward. Here’s a video I made that goes more into depth on how a reverse mortgage can work in a silver divorce or grey divorce.
A reverse mortgage can help in these situations since income qualifying for the loan is much more lenient than on a traditional Fannie Mae forward mortgage. A reverse mortgage does not take into consideration consumer debt monthly obligations or the new proposed reverse mortgage principal and interest loan payment. Reverse mortgage lenders are most concerned that the borrower can afford property charges such as annual property taxes, homeowner’s insurance premiums and H.O.A. dues if applicable.
A spouse wanting to stay in the property can obtain the cash out to buy out the departing spouse without worrying about making a monthly payment to pay it back. The tradeoff is for every month a mortgage payment is not made, the interest and monthly mortgage Insurance premium, if any, that accumulates for that month gets tacked on to the balance of the loan. These charges are collected once the loan is paid off by way of a refinance loan or when the property sells.
Borrowers can also make monthly payments in any amount they want and as often as they like which reduces the balance of the loan. If the balance of the loan exceeds the home value when it comes time to pay off the loan, the borrower(s) or heirs are not responsible for the difference. The lender either absorbs the difference or if the loan is an FHA HECM reverse mortgage, the mortgage insurance will cover the difference.
The three qualifying factors on a reverse mortgage are the age of the youngest borrower, prevailing interest rates, and equity in the property. There needs to be an abundance of equity in the property for this transaction to take place.
The departing spouse with their buy-out funds may also use the reverse mortgage for purchase option to buy a home and with a large down payment ,have a choice to make monthly mortgage payments or not. Typically at least a 50% down payment is required for this home purchase reverse mortgage loan option.
These unique alternatives can create a win-win for both parties, having a place to live with both owning homes and no required monthly mortgage payments if they choose
Not all reverse mortgages are the same. There are new reverse mortgages loans, not federally insured, where the minimum qualifying age is 55, with low loan fee options, and loan amounts up to $4 million for high net worth borrowers.
If you have any questions or concerns or would like me to run a scenario, feel free to give me a call or send me an email. I can run scenarios showing what happens to the mortgage balance when a monthly mortgage payment of your choosing is made or not making a mortgage payment at all. There have also been added enhancements to the loan that have made this option more user friendly and making the reverse mortgage a unique problem solver when it comes to silver/gray divorce situations. Feel free to leave a question or comment below.
Best,
KW