HECM Requirements Updated for Non-Borrowing Spouses

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The requirements on federally insured reverse mortgages are being changed to accommodate surviving spouses who are not on the loan when the borrower dies.

Current guidelines on home-equity conversion mortgages require that the loan be called due and payable when the borrower dies — even if a surviving spouse who wasn’t on the loan still lives in the property.

The existing HECM requirements are based on the Federal Housing Administration‘s interpretation of the National Housing Act.

However, FHA says that recent events have advanced another possible interpretation that would extend the mortgage insurance eligibility requirements to non-borrowing spouse at the time of origination as long as the property is his or her primary residence at the time of death.

So FHA is implementing the alternative interpretation.

The change was authorized by the Reverse Mortgage Stabilization Act of 2013, according to Mortgagee Letter 2014-07 from the Department of Housing and Urban Development.

The property will be considered the primary residence of non-borrowing spouses who are temporarily in a health care institution for no more than 12 consecutive months as long as the property was where they physically lived before the stay.

In order for a non-borrowing surviving spouse to qualify for FHA insurance, they must establish legal ownership of the property within 90 days of their spouse’s death. They also need to ensure all other obligations of the HECM mortgagor contained in the loan documents continue to be satisfied.

With some exceptions, no further HECM draws will be available to the surviving spouse.

The changes go into effect on loans with case numbers issued on or after Aug. 4. Borrowers on existing HECMs aren’t impacted by the update.

“For any HECM with a case number issued after the effective date of this mortgagee letter, in order to be eligible for FHA insurance, the HECM must contain a provision deferring the due and payable status that occurs because of the death of the last surviving mortgagor, if a mortgagor was married at the time of closing and the non-borrowing spouse was identified at the time of closing,” HUD said. “Specifically, the HECM documents must contain a provision deferring due and payable status until the death of the last surviving non-borrowing spouse or until another listed event occurs.”

FHA plans to publish a rule for notice and comment on the changes by May 2.

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