March 13, 2024

8186 / Are the proceeds received from a reverse mortgage taxable?

The IRS considers a reverse mortgage a loan, and because funds received by way of a loan are not considered income, the amount(s) the borrower(s) receive at any given time are not taxable.

March 13, 2024

8187 / Is the interest accrued on the reverse mortgage deductible by the borrower?

According to IRC Section 451, and Treasury Regulation Section 1.451-2, the answer is no.<br /> <br /> Interest on a reverse mortgage added monthly to the outstanding loan balance as it accrues is neither includible in a cash method lender’s gross income, nor deductible by a cash method borrower at the time it is added.

March 13, 2024

8189 / Do heirs have to sell property that is subject to a reverse mortgage to repay the loan upon the borrower’s death?

No, repayment can be accomplished in a number of different ways. If the heirs – or any one heir – want to buy the house, they can pay off the loan and take title. This can be accomplished by putting up the cash required to pay off the loan, by using a conventional mortgage, or using a home equity loan on another property. In reality, the financing options available are limited only by the imagination and credit worthiness of the buyer. If someone wants to buy the property, the only obstacle that they are likely to encounter will be how to come up with the entire amount of the existing mortgage balance regardless of the home’s appraised value.<br /> <br /> There is also nothing stopping a would-be buyer from negotiating the price for which the lender is willing to sell the house; this is particularly true in cases where the market value of the house won’t cover the loan.

March 13, 2024

8182 / What is a reverse mortgage?

<div class="Section1">A reverse mortgage is a loan where the lender pays a homeowner (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while he or she continues to live in the home. With a reverse mortgage, the homeowner retains title to the home. Depending on the plan, a reverse mortgage becomes due with interest when the homeowner moves, sells the home, reaches the end of a pre-selected loan period, or dies. Because reverse mortgages are considered loan advances and not income, the amount received is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. The deduction may be limited because a reverse mortgage loan generally is subject to the limit on home equity debt.<a href="#_ftn1" name="_ftnref1"><sup>1</sup></a> A lender commits itself to a principal amount, not to exceed 80 percent of the property’s appraised value.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Although available through the private sector, the vast majority of reverse mortgage borrowers choose to use a Home Equity Conversion Mortgage (HECM), which are regulated by the Department of Housing and Urban Development (HUD) and only available through an approved Federal House Administration (FHA) lender.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRS Publication 17.<br /> <br /> </div>

March 13, 2024

8188 / Is it possible for an estate or heirs of the borrower(s) to receive funds after the final settlement of a reverse mortgage?

Assuming that the reverse mortgage is not called due to the failure of the borrower(s) to comply with the terms and conditions of the loan, the final settlement of the loan will come due when the borrower(s) sell the home, die, or no longer use the home as the primary residence. At that time, the heirs or estate have six months (this can be extended for a second six months) to repay the lender the principal plus accrued interest, and any other legitimate charges associated with the loan. Should the amount generated from the sale of the home be greater than the amount owed to the lender, all proceeds remaining belong to the borrower(s), heirs, or estate. However this is a “nonrecourse” loan which means that the borrower can never owe more than the value of the home regardless of loan balance; as such, no debt can ever be passed along to the heirs or estate.

March 13, 2024

8190 / Will proceeds received from a reverse mortgage affect Social Security, Medicare, other government benefits, or pension benefits?

It is often suggested that funds received from a reverse mortgage do not affect either government or private retirement benefits; however, there have been cases where the government considered those funds as assets, which resulted in disqualification for Medicaid.<br /> <br /> The following are three examples when funds from a reverse mortgage can affect government benefits:<br /> <blockquote>(1)     If a borrower is on Medicaid, any reverse mortgage proceeds he or she receives must be used immediately to stay within state and/or federal government guidelines for Medicaid recipients.<br /> <br /> (2)     Any funds that are retained by a borrower count as an asset and must be included when calculating Medicaid eligibility.<br /> <br /> (3)     Any income that is generated from the investment of funds received from a reverse mortgage – depending on the tax status of the investment vehicle being used – may be required to be included in the amount of Social Security benefits that are taxable, and at the level those benefits are taxed.</blockquote><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> According to the National Reverse Mortgage Lenders Association, a taxpayer can prevent losing Medicaid coverage by spending all reverse mortgage proceeds in the same calendar month. Only the amount that remains the following month counts as an asset.<br /> <br /> <hr />

March 13, 2024

8196 / Are there any financial assessments that are required in determining a taxpayer’s eligibility for a reverse mortgage?

<div class="Section1">Yes. As a result of several instances in which taxpayers were approved for reverse mortgages where they did not have the financial ability to maintain the home, the Federal Housing Administration (FHA) has issued new financial assessment rules in order to determine whether a taxpayer will be eligible for a reverse mortgage.</div><br /> <div class="Section1"><br /> <br /> For reverse mortgages issued after January 13, 2014, in order to approve a reverse mortgage, the lender must first complete a financial assessment of the taxpayer that includes the following steps:<br /> <blockquote>(1)  performing a credit history analysis,<br /> <br /> (2)  performing a cash flow/residual income analysis,<br /> <br /> (3)  documenting and verifying credit, income, assets and property charges,<br /> <br /> (4)  evaluating any extenuating circumstances and compensating factors that might otherwise impact a taxpayer’s financial position,<br /> <br /> (5)  evaluating the results of the financial assessment in order to determine eligibility,<br /> <br /> (6)  determining if funding sources for property charges from HECM proceeds will be required, and<br /> <br /> (7)  completing a HECM financial assessment worksheet.<a href="#_ftn1" name="_ftnref1"><sup>1</sup></a></blockquote><br /> <span style="font-weight: 400;">Further, in order to qualify for a HECM reverse mortgage, a taxpayer must now fully satisfy any federal judgments and delinquent debts to the federal government (or enter into an approved repayment plan prior to closing the HECM mortgage). The FHA does not similarly require that any state or local judgments be satisfied prior to closing a reverse mortgage.</span><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  HUD Mortgagee Letter 2013-28. The Department of Housing and Urban Development (HUD) financial assessment guide provides detailed guidelines for the financial review, as well as the factors that must be considered in determining whether to issue the reverse mortgage. It is available at http://portal.hud.gov/hudportal/documents/huddoc?id=13-28ml.pdf (last accessed May 30, 2020).<br /> <br /> </div>

March 13, 2024

8198 / What are the consequences if a taxpayer receives disbursements from a reverse mortgage that exceed the new limitations that apply for 2013 and beyond?

<div class="Section1">There are situations where taxpayer could potentially receive reverse mortgage disbursements within the first 12 months that exceed the limitations imposed for loans issued on or after September&nbsp;30, 2013. While the maximum disbursement that a taxpayer is generally entitled to receive from a reverse mortgage at the time the loan is closed, or within the first 12 months after closing, is now limited to 60&nbsp;percent of the principal limit, the taxpayer may also elect to receive the sum of his or her mandatory obligations plus 10&nbsp;percent of the principal limit (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8197">8197</a>).<a href="#_ftn1" name="_ftnref1"><sup>1</sup></a><div class="Section1"><br /> <br /> The borrower under a reverse mortgage may receive initial disbursements of more than 60&nbsp;percent of the principal limit in several situations, including the following:<br /> <blockquote>(1)&nbsp; the taxpayer&rsquo;s mandatory obligations initially exceed 60&nbsp;percent of the principal limit, or<br /> <br /> (2)&nbsp; the taxpayer&rsquo;s mandatory obligations exceed 50&nbsp;percent of the principal limit and the taxpayer elects to receive the full additional 10&nbsp;percent of his or her principal limit.</blockquote><br /> <span style="font-weight: 400;">If the borrower&rsquo;s initial disbursement at the closing (or other disbursements within the first 12 month period) exceeds 60 percent of the principal limit, the cost of the reverse mortgage will increase. Rather than charging an initial mortgage insurance premium (MIP, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8192">8192</a>) of 0.50&nbsp;percent of the maximum claim amount, the borrower&rsquo;s initial MIP will increase to 2.50&nbsp;percent.</span><a style="font-weight: 400;" href="#_ftn2" name="_ftnref2"><sup>2</sup></a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; HUD Mortgagee Letter 2013-27.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; HUD Mortgagee Letter 2013-27.<br /> <br /> </div></div><br />

March 13, 2024

8183 / How is eligibility for a reverse mortgage determined?

<div class="Section1">Eligibility for a reverse mortgage is dependent upon:<br /> <blockquote>(1)  The titleholder for the property must be at least 62 years old, and if title is held jointly, the youngest of the two titleholders must be at least 62.<br /> <br /> (2)  The property must be a single family home, an FHA approved condo, or a multiple family dwelling consisting of at least two, but no more than four, units.<br /> <br /> (3)  The home must be occupied by and be the primary residence of the borrower(s).<br /> <br /> (4)  There must be enough equity in the home to cover the payoff of all existing mortgages, liens, or legal obligations tied to the home.</blockquote><br /> The above listed requirements for eligibility are based on those that have been set by HUD for their Home Equity Conversion Mortgage Program (HECM) which covers over 90 percent of all reverse mortgages presently being written.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> However, it is important to recognize that there is a private market that many borrowers turn to for reverse mortgages. Those who choose this private marketplace may find that these individual or corporate lenders have their own criteria that differ from HECM’s.<br /> <br /> <hr /><br /> <br /> </div>

March 13, 2024

8193 / Can a HECM be used to purchase a new home?

<div class="Section1">Yes. Known as the HECM for Purchase, this program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction.</div><br /> <div class="Section1"><br /> <br /> This program has been available since it was originally introduced as part of the Housing and Economic Recovery Act of 2008, yet has only recently started gaining popularity.<br /> <br /> The Federal Housing Administration (FHA) defines “HECM for Purchase” as a real estate purchase where title to the property is transferred to the HECM mortgagor, where the mortgagor will occupy as a principal residence, and, at the time of closing, the HECM first and second liens will be the only liens against the property. HECM mortgagors must occupy the property within 60 days from the date of closing. Lenders are required to ensure all outstanding or unpaid obligations incurred by the prospective mortgagor in connection with the HECM transaction are satisfied at closing.<br /> <br /> Only properties where construction is completed are eligible for a HECM-for-Purchase.<a href="#_ftn1" name="_ftnref1"><sup>1</sup></a><br /> <br /> The funding of a HECM for Purchase is an area that has generated an unexpected amount of confusion and debate among borrowers and some advisors. In order to help clarify this, the following text has been taken from the Mortgagee Letter 2009-11 dated March 27, 2009, addressed to All FHA-Approved Mortgagees and All HUD-Approved Housing Counseling Agencies:<br /> <br /> <b>FUNDING SOURCES: </b>HECM mortgagors must use cash on hand or cash from the sale or liquidation of the mortgagor’s assets for the required monetary investment. The monetary investment requirement can also be met by the use of approved funding sources as defined in HUD Handbook 4155.1 REV-5, section 2-10, with the exception of the following funding sources which <b>may not</b> be used:<br /> <br /> Sweat Equity<br /> <br /> Trade Equity<br /> <br /> Rent Credit<br /> <br /> Cash or its equivalent, in whole or in part, from the following parties, before, during or after loan closing:<br /> <p style="padding-left: 40px;">The seller or any other person or entity that financially benefits from the transactions, or</p><br /> <p style="padding-left: 40px;">Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in the previous bullet.</p><br /> FHA prohibits seller contributions (also known as “seller concessions”), the use of loan discount points, interest rate buy downs, closing cost down payment assistance, builder incentives, gifts or personal property given by the seller or any other party involved in the transaction. This includes customary charges that are normally paid on behalf of the borrower by the seller.<br /> <br /> <b>GAP FINANCING: </b>Consistent with existing regulatory requirements in 24 CFR 206.32(a), HECM mortgagors may not obtain a bridge loan (also known as “gap financing”) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  HUD Mortgagee Letter 2007-06.<br /> <br /> </div>