Private reverse mortgages become helpful tools
As seniors stay in their homes for longer periods, one of the continuing concerns is how to pay their regular bills, whether those bills come in the form of health insurance premiums, property taxes, utilities, home maintenance, gas or groceries. For those who have paid their mortgages, many still have significant value in their homes but are cash-poor.
Over the past several years reverse mortgages through banks and other lenders have become a commonly used tool to tap into home equity without selling the home. Home equity loans have also been used but these require regular payments that the seniors involved cannot afford.
There is another alternative that does not involve commercial lenders and that has proved useful for many families — a private reverse mortgage with adult sons or daughters acting as the “bank.” In addition, for children who would want to assist their parents anyway, these arrangements can protect the adult child’s investment in money and time if their parents need Medicaid at a later date. Even if parents never need and never apply for Medicaid but only have other creditors such as medical providers or credit card companies, a private reverse mortgage places the adult child in a favored position to recover investments of money and time on behalf of their parents.
The reason why children take a preferred position as opposed to Medicaid and as opposed to other creditors is because with a private reverse mortgage they are secured creditors and are paid at time of settlement on the house in the same way any other mortgage holder would be. The reason why the arrangement works well for parents is because they do not need to pay until a later date, whenever the house is sold. Children cannot force a sale of the house.
Once we get beyond the notion of entering into agreements with family members for the benefit of all parties involved, this idea makes a lot of sense and, in the right case, can provide the cash and security that parents need and protection for children who advance funds or provide labor and other assistance to parents.
Here are some examples how this works.
Suppose a parent who is living on Social Security and retirement benefits realizes that he or she is unable to meet the regular monthly bills or, in a crisis, needs additional funds for medical or other purposes.
He can enter into a written agreement with his adult son or daughter to borrow the funds. A reverse mortgage is recorded on the home. The parent would realize that, like reverse mortgages placed with commercial lenders, the private reverse mortgage would not need to be paid until later, usually when the house is sold.
But there are additional benefits from dealing with a close family member. For one thing, fees can be significantly lower and default provisions not nearly as strict.
For instance, in placing a regular reverse mortgage on a house, where the senior leaves home — even if for medical reasons — for a year or more, the loan goes into default. This provision would not typically be placed in a private reverse mortgage.
In a second example, suppose a parent wishes to move but, before this is possible, she needs significant work to be done on the home. Children could advance the funds or possibly even provide the labor themselves. They can be repaid with a private reverse mortgage which is recorded on the home which will be satisfied at time of settlement.
Other possibilities include a written agreement between parents and an adult child for the child to provide certain services including housekeeping, record keeping, monitoring of medications, errands and other services. I have frequently described this arrangement in other columns as a family agreement. The family agreement could be secured with a reverse mortgage on the home and paid when the house is sold at a later date.
If the parent needed to qualify for Medicaid at some point in the future, the private reverse mortgage on the house would take precedence over Medicaid and payment to the adult child would not be considered a gift that could otherwise result in financial penalties.
This type of arrangement should only be entered into through professionals who understand how the system works.
However, as parents and children begin to compare their relationship to a business partnership, many productive solutions can be put into effect to protect everyone involved.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.