How a Reverse Mortgage Eases the Financial Strain
of "Grey Divorce"
When a senior goes through a “Grey Divorce”, the challenges aren’t just emotional. Splitting up the house and compensating the “leaving” spouse becomes extremely difficult; especially when you’re on fixed income.
In this article we’ll dive deep into how seniors can use a reverse mortgage to split up the house WITHOUT disrupting the “staying” spouse’s assets or cashflow. Whether you’re a senior, an adult child, or a professional like an attorney or financial advisor, you’ll learn all of your options right now.
WHAT THE NUMBERS SAY
According to Pew Statistics, adults 50 or older have a divorce rate that’s doubled since the 1990’s. That number is only going to climb as we live longer. I mean, knowing that tomorrow isn’t guaranteed, you really want to enjoy each day and have no regrets.
Many seniors that we work with have “compromised” through life with an unwanted partner for the sake of the kids; but now that the children are grown it’s easier to free yourself.
But for senior homeowners who are looking to split, how can you divide the house, pay off the “leaving” spouse, but not negatively impact the “staying” senior’s cash flow?
CAROLYN & ROGER’S GRAY DIVORCE STORY
Let’s look at Carolyn and Roger. They are both in their mid 70’s, and while they reared two wonderful daughters, and live in an old two story home outside of Boca Raton, FL. Carolyn had hobbies and loved to be “out and about”, but once she started to develop some health problems, she became bound to her home. Roger was more of a homebody at heart. He tends to his garden and has his “projects”, but he enjoys his alone time more than most.
Carolyn and Roger’s relationship soured as they saw too much of each other, and with no growing children to keep them together, they decided it was time to separate.
After meeting with a gray divorce mediator, they decided that Carolyn would move to a single story senior community and Roger would stay in their home. Carolyn couldn’t get up the stairs without trouble, and the home they’re in takes quite a bit of maintenance; something that Roger loves doing.
Working with the mediator’s financial advisor, Carolyn and Roger came up with a plan to split the assets, but they couldn’t figure out how to get the house to work. Because Carolyn was leaving, she needed to be paid out enough to afford her new home. But Roger had serious problems.
They didn’t have enough retirement assets to safely split so Carolyn could get paid, and Roger’s fixed income wasn’t enough for him to qualify for a “traditional” mortgage. In other words, the grey divorce was on hold.
ENTER THE REVERSE MORTGAGE
Carolyn and Roger’s gray divorce mediator introduced them to me, and from a high level it looked like they might be able to use a reverse mortgage to facilitate the silver separation. Their financial advisor reviewed and approved the plan, and they were off to the races.
Here’s how we used a reverse mortgage to pay off the mortgage.
First, the home appraised for $557,000(when we approve someone for a reverse mortgage, we use age and home value). We used Roger’s age of 76, because Carolyn was moving out. There weren’t any liens on the home besides a $29,000 HELOC, which we paid off through the reverse mortgage.
After the HELOC was paid off, there was $278,000 left over for Roger.
The gray divorce mediator got a court order that specified that the majority of that $278,000 went to Carolyn, who was paid $263,500 through the loan.
Roger received the remainder of the funds, or $14,500 through the loan as a line of credit.
ROGER DOESN’T HAVE TO MAKE A MORTGAGE PAYMENT ON THIS MONEY
That’s right; because of the unique characteristics of the reverse mortgage, Roger isn’t required to pay the mortgage on a monthly basis(or ever). He is required to continue to pay his property taxes and homeowners insurance, because he’s still the homeowner.
The most important aspect of this “transaction” however, is that it allowed two wonderful people to split the house without hurting either one. Remember, Roger didn’t have the funds to safely pay Carolyn off, and his fixed income was too tight to get a “traditional mortgage”.
Truth be told, I rarely recommend “traditional mortgages” for seniors without strong sources of income anyway, because 86% of the time the strain on their cashflow is just too much.
Working with the mediator’s financial advisor, Carolyn and Roger came up with a plan to split the assets, but they couldn’t figure out how to get the house to work. Because Carolyn was leaving, she needed to be paid out enough to afford her new home. But Roger had serious problems.
They didn’t have enough retirement assets to safely split so Carolyn could get paid, and Roger’s fixed income wasn’t enough for him to qualify for a “traditional” mortgage. In other words, the grey divorce was on hold.
We have more information about reverse mortgages below, but if you need to learn if a Reverse Mortgage can help facilitate a Gray Divorce, feel free to call us toll free at (888) 309 9705 or click below for a detailed proposal.
CLICK HERE FOR A FREE REVERSE MORTGAGE ANALYSIS
A DEEP DIVE INTO REVERSE MORTGAGES
Now that we’re familiar with Carolyn and Roger’s success with their grey divorce, let’s go a bit deeper into how a Reverse Mortgage got them to the finish line. Basically, a Reverse Mortgage is just a loan for senior homeowners, that allows them to take part of their home’s value out in cash, without being required to make monthly mortgage payments. Here are a few unique characteristics of the Reverse Mortgage…
✅ No Mortgage Payment Required(although property taxes/hoi/hoa is required)
✅ The Senior Stays On Title and Has Full Home Ownership(just like a regular mortgage)
✅ The Home Passes to the Heirs when the Senior(and spouse) Dies
✅ Flexible Payment Options(up front cash, monthly income, line of credit or any combination)
✅ No Taxes Charged on Loan Proceeds(because this is a loan and will eventually be paid back-with that said we are not tax advisors…please consult a licensed tax advisor with any tax questions)
✅ The Senior’s Spouse is Protected; Even if She is Underage(as long as she continues to live in the home a spouse can not lose the home). Obviously in the case of gray divorce we’re using a reverse mortgage to assist a spouse in leaving, but it’s good to lay the groundwork just the same.
Again, it’s important to know that this is really just a secured loan(just like a mortgage) with flexible payment requirements.
HOW CAN I QUALIFY FOR A REVERSE MORTGAGE?
Here, we’ll go over how you can qualify for a reverse mortgage and what questions the underwriters ask. You can use these guidelines for a gray divorce.
✅ The First Qualification is AGE. The majority of Reverse Mortgages require one spouse to be at least 62 years old. There are a few Jumbo Reverse Mortgages that only require the home owner to be 60. Whether you’re getting a traditional or a jumbo(proprietary reverse mortgage), there is no upper limit. I recently helped a 103 year old lady get a reverse mortgage so she could pay for her home healthcare.
It is also important to realize that you can never become too old for a reverse mortgage once you’re in it. If you get a reverse at age 62 and live until you’re 108, that’s fine. No one can ever call the loan due as long as you live in your home and continue to pay your property taxes and homeowners insurance.
✅ EQUITY is the Next Qualification. You can always get a reverse mortgage if you have no liens on your home(a lien means a mortgage, HELOC, judgement etc), but what if you DO owe money on your home? Here’s a base calculation of what you can owe and still get a reverse mortgage(based on age). Again, you can use this a guideline for “silver separation”.
Age % Of Home Value Qualified
💲 62-70 47-56%
💲 71-80 57-62%
💲 81-90 63-72%
💲 MAX CASH 75%
Now, higher value homes will increase the percentage of eligible funds, while lower value homes will decrease the percentage. Just for your information, I ran these numbers off a home worth $400,000.
✅ Next, let’s talk INCOME. No, you aren’t required to make mortgage payments with this program, but you do have other senior living expenses like property taxes, homeowners insurance, utility bills, grocery bills, medicare supplements etc. We need to ensure that you have enough money coming in to pay for all of these expenses. Fortunately, we can use the money you’re getting through the reverse mortgage to help you qualify.
Remember, with gray divorce, you’re splitting your household income in half, so we need to take extra care to ensure that you can still live in your home financially comfortable.
✅ CREDIT is the final consideration. First, WE DO NOT CARE WHAT YOUR CREDIT IS. What we care about is the quality of your credit. For example, we frequently help folks with credit scores in mid 500’s. In a perfect world, you have no lates on your mortgage or credit cards. However, if you do have lates(or collections, judgements, bankruptcies etc) we can explain them away.
For example, sometimes folks have a medical emergency and they can’t pay their bills(either because they are too expensive or the senior is stuck in the hospital). In that case, as long as we can show that you were acting responsibly and you’ll be able to keep your bills up with the reverse mortgage, you’ll be fine. This obviously pertains to gray divorce as well, as separations oftentimes lead to missed and late payments.
HOW DOES THE PROCESS WORK?
- First, we speak to go over your needs and eligibility. If you’re working together with a gray divorce mediator or financial advisor, we’ll speak with them if you’d like us to. If your silver separation is adversarial we will eventually need to speak with your spouse and/or their attorney, but that doesn’t have to occur immediately.
- Next, you speak with a Reverse Mortgage Counselor(this is mandatory for everyone who buys a home using a Reverse Mortgage). Your spouse will also be required to speak with a Counselor, however it doesn’t need to be on the same call. The counselor is required by HUD and explains the basics of what you’re doing. Word to the wise; make sure you’re being counseled for the correct program. If you’re getting a Jumbo Reverse Mortgage you’ll need to be counseled for that exact product(I walk all of my clients through the specifics…so don’t worry)
- The next step after counseling is to complete an application and provide us documentation for underwriting. The application is not binding, so if you get back together or decide to halt the process for any other reason you’re not locked in.
- After the contract is in, and the counseling AND application are complete, we’ll order an appraisal.
- We’ll underwrite your Reverse Mortgage, and gather the necessary documentation. Depending on the case we may need a court order to facilitate the distribution of funds.
- Once underwriting is complete, you’ll sign the final documents on settlement day! You can “close” wherever you feel comfortable.
- The total process takes about 45 days, although in some circumstances we can rush if need be.