FAQ from HECM and the Non-Borrowing Spouse Webinar

Transcription

1 FAQ from HECM and the Non-Borrowing Spouse Webinar Eligibility and Pre-Closing Issues Q: What is the definition of Non-Borrowing Spouse (NBS)? A: The spouse, as determined by the law of the state in which the spouse and mortgagor reside, or the state of celebration, of the HECM mortgagor, at the time of closing, and who is not a mortgagor. Q: Does this include common-law spouses? A: Yes, if recognized as legal in the state where the borrower lives Q: Does this include same-sex spouses? A: Yes, if recognized as legal in the state where the borrower lives OR in the state where the marriage took place. Q: Does the borrower have to show a marriage license as part of the loan application? A: HUD does not require this, but it is possible that lenders may choose to do so. Q: What if the borrower has a spouse but does not disclose this in the loan application or at closing? A: The certification that the borrower has to sign explicitly states that the borrower is either married or unmarried, and it also includes a statement about potential federal penalties for false statements. Q: Does it matter whether the spouse is on title or not? A: No. If there is a spouse, whether or not they are an owner at the time of loan application, they must be named and must complete and sign the NBS certification. Q: If the NBS is too young or otherwise ineligible for the HECM, does s/he still have to be removed from title prior to closing? A: Yes, it appears that this is the case. This might change in future. Q: Does it matter if the spouse is separated from the borrower? A: Yes. In Mortgagee Letter 15-02, HUD defined two types of NBS: Eligible and Ineligible. If the home is not considered the principal residence of the absent spouse, s/he is defined as Ineligible, and will not be able to obtain a deferral when the borrower dies. The age of such a spouse will not be taken into account in calculating the principal limit. Q: What about spouses who marry the HECM borrower after closing? A: They are not eligible for deferral of repayment. Q: If there is a spouse, but s/he does not meet the criteria to be eligible for a deferral, is the NBS age still used in the Principal Limit calculation? A: No NeighborWorks Center for Homeownership Education and Counseling Working Together for Strong Communities

2 Q: How does the age of the NBS affect the loan amount? A: The new Principal Limit Factor Tables (which specify the percentage of home value available to borrowers at different ages and interest rates) are used for either the borrower or the NBS, whichever is younger. Q: If one spouse is 75 and the other is 65, and the HECM proceeds based on age 65 will not be enough to pay off an existing mortgage, can the younger spouse be removed from title and opt out of the deferral so that they can get more money from the HECM? A: No. If there is an Eligible NBS, that person s age must be used in calculating the principal limit, so taking the 65 year old off title would not allow the borrower to receive more money. Eligible NBS are NOT permitted to opt out. The only way to get around this situation would be to make the younger spouse Ineligible in some other way, such as having a different principal residence. Q: Does the presence of the NBS affect anything else about the HECM? A: No. All other features remain the same, including payment plans, etc. Q: If the NBS is declared at closing, is s/he considered a borrower on the HECM loan? A: No. The NBS only signs the NBS disclosures, not the whole loan agreement or other paperwork. S/he is NOT a borrower. Q: Can lenders add additional requirements, such as that the couple must have been married for a minimum period of time in order to qualify as an Eligible NBS (or separated for a minimum period to be considered Ineligible)? (Similar to the added seasoning requirements for ownership that are added by some lenders.) A: There is nothing in this ML that seems to forbid such a practice. Post-Closing Issues Q: Once the loan has closed, what does the NBS have to do in order to remain eligible for deferral of repayment after the borrower dies. A: The NBS must certify annually that he/she still lives in the home and is married to the borrower. Q: What if the NBS is away from the home for periods of time but remains married to the borrower? A: The NBS must maintain the home as his/her principal residence. This does not prevent him/her from being away for short periods, in the hospital, on vacation, etc. If the NBS were out of the home for more than a year, this would almost certainly void his/her eligibility for deferral, however. Q: Under what circumstances can the NBS obtain a deferral of repayment on the HECM? A: The ML mentions only the borrower s death. Evidently the deferral does not apply for a borrower who has made a permanent move out of the home, whether for health or any other reasons. Q: Could this result in abuses, where the borrower is kept in the home when he/she really needs to be in a health care facility, in order to prevent the loan from coming due? A: Yes, that is possible, as it has always been a possibility with a NBS situation.

3 After the Borrower Dies Q: What does the NBS have to do when the borrower dies? A: If not already on title, NBS must move as quickly as possible to establish legal ownership or right to live in the property. This must be accomplished within 90 days of the borrower s death, according to ML Q: Can the NBS use a Transfer on Death deed to establish legal ownership? A: If the state where the home is located has the option of a Transfer on Death deed, and if the legal transfer is actually complete within 90 days, then this should work. Clients seeking to use this method should consult an attorney to be sure that this is feasible in their state. Q: What would be an example of legal right to live in the property other than ownership? A: The ML gives the example of an executed lease or court order. A lease might come into play if someone other than the NBS inherits the property (e.g., the children of the borrower from a previous marriage) and that heir is willing to rent the property to the NBS. This might also work if the property is owned by a trust. Another possibility would be if the NBS has a life estate interest in the property (preferably established prior to the borrower s death). Q: If the NBS is unable to establish legal right to live in the property within 90 days of the borrower s death, do they still have 12 months to sell the home and pay off the HECM? Does the 12 month period begin after the 90 days? A: This is not addressed in the ML, but in practice it is likely that lenders will allow an initial 3-6 month period with at least one potential 3 month extension if the NBS is in the process of selling the home. Q: Can the NBS still sell the house if they do establish a deferral? A: Yes, if s/he has legal ownership of the property, s/he can sell the house and pay off the loan at any time. Q: What if the property is inherited by someone other than the NBS and that heir wants to sell the house? A: If there is no life estate for the NBS, other heirs or the estate would still have the right to sell the home at any time. The NBS deferral only operates as long as the NBS has the right to live in the home. Q: What does the NBS have to do to keep the deferral in place? A: NBS must meet all obligations specified in the loan documents, including paying taxes, insurance, and maintenance on the property. NBS must also maintain the property as primary residence. Q: How will the lender know if the NBS is living in the home? A: The NBS will receive an annual request to certify that the home is the primary residence. Q: What if the NBS has to live in a nursing home or other healthcare institution? A: As is true for a borrower, the NBS can be away from the home for up to 12 months for health reasons.

4 Q: Can the NBS use HECM proceeds to pay taxes and insurance, or make repairs to the property? A: No. The NBS will not have access to any HECM proceeds after the borrower s death. This includes any funds that were placed in a Life Expectancy Set-Aside at closing (per ML 14-21). If they anticipate needing funds from the line of credit, loan advances must be obtained prior to the borrower s death. Q: Is interest and MIP still added to the loan during the deferral? A: Yes, the loan balance continues to grow just as it did during the borrower s lifetime, until the loan is repaid. Q: If the NBS remarries, does this affect the deferral? A: This is not addressed in the ML, but it would appear that as long as the NBS meets all requirements of ownership, residency, paying property charges, etc., s/he could still continue the deferral. Q: Once the deferral is established, how long does it last? A: There is no time limit, as long as the NBS continues to live in the home and fulfill the obligations under the HECM. Q: When the NBS dies, do the heirs still have time to sell the home and pay off the HECM. A: The ML states that the HECM becomes immediately due and payable, but in practice it is likely that they would be given time to sell the property, just as is the case when the HECM borrower dies and there is no NBS. Other issues: Q: When does the distinction between Eligible and Ineligible NBS, described in ML 15-02, go into effect? A: ML states that lenders MAY use this distinction for case numbers issued on or after January 12, 2015 and MUST use it for case numbers issued on or after March 9, Q: Does ML apply to NBS where the HECM loan was originated prior to August 2014? A: No. The deferral provisions in this ML only apply to loans whose case number was obtained on or after August 4, 2014? Q: Are NBS in pre-2014 HECMs protected in any way? A: HUD issued Mortgagee Letter on January 29, 2015, providing an optional framework by which lenders MAY choose to assign these loans to HUD before the usual time, thus relieving the lender of the obligation to foreclose on the NBS. However, the conditions for eligibility for this relief are very narrow. The conditions are: 1) The NBS would have had to qualify for a larger principal limit than the borrower at the time of closing (meaning that the NBS was older than the borrower, which is highly unlikely) OR 2) The current balance on the loan must be smaller than the current principal limit would be if the NBS had been on the loan at closing. Since the second option uses the principal limit factors that were in effect at the time of closing, this means that any NBS who was under the age of 62 at closing would not be eligible, regardless of the current balance on the loan.

5 If the NBS was over 62 at closing, but the current balance is too high, they do have the option of paying down the balance to the point where they would qualify. This provides a way out for NBS in situations where the balance is high because all available funds were drawn at closing, but the funds have not all been spent yet, or where other assets are available to pay down the loan. This might not seem ideal, but it might be easier than repaying the entire HECM in order to remain in the house. Q: If a borrower has a HECM that closed prior to August 2014, can they refinance so that their NBS would have the possibility of a deferral? A: Yes, assuming that they were able to qualify for the refinance when the NBS age was taken into account. Counseling Issues: Q: How does this affect counseling? A: Counselors must make efforts to determine whether there is a NBS and must advise the borrower that the NBS has to receive counseling. Q: If the prospective borrower and the NBS are separated, do we still counsel the NBS? A: Yes. If they are still legally married at the time of closing, the NBS will have to be declared. The lender will determine whether or not s/he is an Eligible or Ineligible NBS. Q: What if the borrower says the lender told them that the NBS did not have to be counseled? A: Advise the borrower that HUD requires counseling for the NBS. Q: What if the borrower does not disclose the existence of the NBS until the counseling session is underway? A: Advise the borrower that the NBS will need to receive counseling in a separate session. Q: How do we counsel the NBS? A: HUD stresses the importance of making sure the Eligible NBS knows the importance of establishing legal ownership or right to remain in the property within the 90 day timeframe. Counselors should also help the NBS to consider whether s/he will have the financial means to maintain the home and pay taxes/insurance if the borrower dies. Q: Should we advise the NBS to be placed back on title after closing? A: In the case where the NBS is not going to be on title because s/he is under 62, it appears that getting the NBS back on title after closing would be a good idea. Borrowers/NBS should check with lenders to make sure this is permissible. If the NBS is over 62, there is no longer any reason to remove him/her from title to increase the loan amount. If the NBS is not on title for some other reason (e.g., other heirs), the borrower and NBS should consider other ways to protect the NBS in the event of the borrower s death. Counselors must refrain from giving legal or estate planning advice and should refer clients to such professionals where appropriate. Q: How would you counsel the borrower and NBS about whether or not to withdraw available HECM proceeds if it seems that the borrower is about to die? A: As a counselor, you should certainly discuss the fact that the NBS will not have access to proceeds after the borrower s death, and you may remind them that withdrawing funds shortly before the borrower dies would be one option to make those funds available.

6 Q: Does the NBS sign the counseling certificate? A: Yes. The new form of the certificate provides space for a NBS to be named and to sign the certificate. Q: If there is a NBS but s/he is Ineligible because the home is not her/his principal residence, does s/he still sign the certificate? A: Yes, Ineligible NBS must also be counseled and sign the certificate to prove that they were counseled. Q: What if the lender or underwriter requests that the NBS name be removed from the certificate? A: Advise them that HUD requires the NBS to receive counseling and to sign the certificate. If the lender insists, then make the change, but keep a copy of your original certificate as well as the new one, and make notes in your client file regarding the lender s request. Q:If there are other non-borrowing owners participating in counseling, are their names listed in the NBS space on the certificate or in the owner spaces? A: It is probably best to list them as owners, reserving the NBS space for actual non-borrowing spouses. Q: Is there any other paperwork that counselors must complete for NBS situations? A: HUD refers to an individual statement that the NBS is to sign at counseling and states that counselors should continue to use these forms. Q: Has HUD provided a form for the NBS statement? A: No. If the counseling agency does not have a form in use already, using the same text that is specified in the ML for the NBS certification at closing would be a good start. Agencies can add to this if they see fit. Note that ML prescribes different language for an Eligible vs. and Ineligible NBS. You can have two versions of your form, or create one version that takes both situations into account. Q: If the NBS is to sign the individual statement, and we are doing telephone counseling, what do we do if we don t get it back? A: Keep a copy of the statement that you sent to the NBS, and make a note on it to indicate that the NBS did not return the signed copy as requested. Keep it in your files. Alternatively, you could tell the client that you will mail or fax their counseling certificate only after you have received the NBS individual statement back.