Laurie MacNaughton © 2022
Equitable distribution can be among the most complex issues in any divorce. When the divorcing parties are aging adults, an additional layer of complexity may be involved.
Historically, there have been two solutions to equitable distribution: sell the marital home, or refinance the existing mortgage to clear the departing spouse from the note.
However, either solution may be suboptimal. If one party has impaired health, moving can be severely stressful. Additionally, homes currently for sale may be unsuitable if the individual parties are hoping to purchase. It also bears mentioning that because one party—or both parties —may experience a reduction in income following the divorce, obtaining a new purchase-money mortgage may not be within reach.
Similarly, refinancing a home can be difficult, or simply impossible, on one income.
Reverse mortgage overview
A reverse mortgage is a home equity loan. It differs from other home equity loans in that a reverse mortgage loan is not repaid until the last person on title permanently leaves the home. In other words, the homeowner can borrow some of their home’s equity without picking up a monthly mortgage payment.
Because this is a mortgage, it will eventually be repaid—but it is repaid on the back end, in reverse. Only the loan amount is repaid; all remaining equity goes to the heirs or estate.
Applicability to Silver Divorce scenarios
Spouse remaining in the marital home:
In cases where couples have been married many years, there may be equity enough in the home for proceeds from the reverse mortgage to pay the departing spouse’s portion of the marital share. At very least, reverse mortgage proceeds plus an additional cash payment to the departing spouse may make it possible for one partner to retain the property. This would be a Reverse Refinance scenario.
The spouse relocating after divorce may face unanticipated challenges when looking to purchase. Common challenges include newly-reduced household income; unfavorable debt-to-income ratios; excessive credit utilization; and negative mortgage-payment history incurred during the marriage.
A strong option may be Reverse for Purchase. This purchase loan works in the following manner: the homebuyer provides a down payment, the size of which is determined by the homebuyer’s age. The loan provides the rest of the purchase price.
The general formula should sound familiar:
down payment + plus loan amount = purchase price of the home
However, unlike a “forward” mortgage, with Reverse for Purchase, there is never a required monthly mortgage payment—though the homeowner may make a payment at any time if s/he so wishes.
Not making payments is very different from saying the loan is never repaid. The loan is always repaid—it’s just not repaid on a monthly basis. Rather, the loan is repaid when the last person on title moves, sells, or dies. In other words, the loan – interest and principal—is repaid once the homeowner no longer needs the home.
Of course, a reverse mortgage will not work in every divorce situation. But in many divorces in which the divorcing parties are 62 or older, reverse mortgage may serve as an option for meeting the financial mandates of the Property Settlement Agreement and for meeting the housing needs of the relocating spouse.
Divorce is no one’s “Plan A.” But as the classic line goes, life is what happens while you’re making other plans.
If you have questions about how a reverse mortgage might help your client, give me a call. I always love hearing from you.